March 3, 2014

LOST? The Feeling A Taxpayer May Get at the Thought of Another Local Tax 2014 Kentucky General Assembly Considers Constitutional Amendment Required For Authorization of Local Option Sales Tax

Written By

Timothy J. Eifler
Member, Stoll Keenon Ogden PLLC

by Timothy Eifler

The 2014 Kentucky General Assembly is once again considering amending the Kentucky Constitution to permit local governments to impose sales tax.  Two bills have been introduced that would propose constitutional amendments to be approved by Kentucky voters in the November election.  The bills propose a new section of the Kentucky Constitution granting the General Assembly the power to authorize cities and counties to impose a local option sales tax.  This new tax, however, would not be without limits.  Similar legislation failed in 2013.

Current Law

Currently, local jurisdictions in Kentucky may not impose a sales tax, or any other excise tax.  The Kentucky Constitution empowers the General Assembly to authorize local governments to levy (ad valorem) property taxes and license taxes. See Ky. Const. §§ 171, 172, 174 and 181.[1]  Last year, the Kentucky Attorney General re-affirmed this limited legislative authority.  In OAG 13-001, the Louisville Metro Council inquired as to whether the General Assembly could enact a local option sales tax without an amendment to the Kentucky Constitution.  Examining Ky. Const. § 181 and prior Kentucky case law, the Attorney General concluded that a local option sales tax is an impermissible local excise tax.

The Proposed Amendment

As stated above, tandem bills have been introduced in the current session of the Kentucky legislature that would authorize local option sales taxes.  S.B. 135 and H.B. 399 would amend Section 181 of the Kentucky Constitution to permit the General Assembly to authorize cities and counties to impose a local option sales tax.  Both bills are supported by the Kentucky League of Cities, Kentucky Association of Counties and Kentucky Chamber of Commerce.

The proposed amendment, as currently drafted, imposes certain limitations on the legislature’s ability to authorize such an imposition.  Prior to any imposition, any local levy must be approved by a majority of those voting at a general election within the city or county proposing the tax  The proceeds from any local levy can by used only for capital projects.  The maximum tax rate that may be imposed within the boundaries of a single county cannot exceed one percent (1%).  Any levy shall be limited in time, for a specific number of years and may not extend beyond the time necessary for completion and full payment for the project or projects.  The General Assembly may allow for collection of the tax by the state on behalf of the city or county. If enacted, the constitutional amendment must be approved by a majority of the voters in the November general election.

Notably, there are no prescribed limits upon the scope of the tax, nor are there limits on what is included within the terms “projects” and “programs”.  A separate bill is expected soon which will address how the new taxing power would be implemented. 

One primary issue to be resolved by the implementing legislation is how local governments in the same county would share the new taxing power.  County taxing power overlaps that of cities within the county boundaries.  In Louisville-Jefferson County alone, there are 82 suburban cities with independent taxing authority.  Since no more than a one percent tax can be levied in any county, the bill must address how cities and counties would share the new power.

Effect of the Amendment

Beyond the obvious effects of the proposed amendments on taxpayers at the cash register, this amendment can be detrimental to the Commonwealth if not enacted properly.  As a full member of the Streamlined Sales and Use Tax Agreement (the “Agreement”), any local sales tax must meet the requirements of the Agreement.  Otherwise, Kentucky would become non-compliant and could be penalized or expelled from the Agreement.

Pursuant to § 301 of the Agreement, each member state must provide state administration of all sales and use taxes.  Furthermore, sellers and purchasers may only be required to register with, file returns with, and remit funds to the state authority.  Finally, only the state authority may conduct audits.  Local jurisdictions could not conduct independent sales or use tax audits of sellers and purchasers.  Instead, they must wholly rely upon state administration and distribution of the tax funds.

The Agreement provides in § 302 that the local option sales tax must have the same tax base as that of the state sales tax, with certain exceptions.  Failure to use the same tax base would result in non-compliance with the Agreement.  Additionally, Kentucky would have to abide by specific administrative duties relating to the local option sales tax.  Those duties are outlined in § 305 of the Agreement and include providing a minimum of sixty days’ notice to sellers of rate changes, maintaining a database that describes boundary changes for all taxing jurisdictions, and maintaining a database of all sales and use tax rates for all of the taxing jurisdictions.  Failure to abide by any of these duties also would result Kentucky being out of conformity with the Agreement.

In drafting the proposed amendment and any subsequent implementing legislation, the General Assembly must look beyond the fiscal impact of the tax to determine all ramifications.  Although the proposed amendment may appear to be a great revenue source for local governments, unless enacted in compliance with the Agreement it could have a negative impact on the State.

[1] See Driver v. Sawyer, 392 S.W.2d 52 (Ky. 1965); City of Lexington v. Motel Developers, Inc., 465 S.W.2d 253 (Ky. 1971); Wiedemann Brewing Co. v. City of Newport, Ky., 321 S.W.2d 404 (Ky. 1959); Lamar v. Board of Ed. of Hancock County School Dist., 467 S.W.2d 143, (Ky. 1971).

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