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Kentucky Attorney General Rules Constitutional Amendment Required for Authorization of Local Option Sales Tax

by Erica Horn and Stephen Sherman

The Kentucky Constitution does not permit local governments to impose a sales tax. That may soon change. On January 8, 2013, Sen. Kathy Stein introduced Senate Bill 30 to the Kentucky General Assembly. The bill proposes 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.

Current Law

Currently, local jurisdictions in Kentucky may not impose a sales tax, or any other excise tax. The authority to impose local taxes is set forth in Ky. Const. § 181:

The General Assembly shall not impose taxes for the purposes of

any county, city, town or other municipal corporation, but may, by

general laws, confer on the proper authorities thereof, respectively,

the power to assess and collect such taxes. The General Assembly

… may, by general laws, delegate the power to counties, towns,

cities and other municipal corporations, to impose and collect

license fees on stock used for breeding purposes, on franchises,

trades, occupations and professions. And the General Assembly

may, by general laws only, authorize cities or towns of any class to

provide for taxation for municipal purposes on personal property,

tangible and intangible, based on income, licenses or franchises, in

lieu of an ad valorem tax thereon: ….

Therefore, with the permission of the General Assembly, the Constitution permits local governments to impose license taxes and ad valorem property taxes. Kentucky’s highest court has consistently held that local governments are limited to those forms of taxation and may not impose excise taxes, including a sales tax. 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).

Recently, the Kentucky Attorney General confirmed this limitation. In OAG 13-001, the Louisville Metro Council inquired as to whether the General Assembly could enact a local optionsales 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. Therefore, without a constitutional amendment, the General Assembly may not allow for and a local government may not impose such a tax.

The Proposed Amendment

As stated above, Senate Bill 30 would amend the Kentucky Constitution to permit the General Assembly to authorize cities and counties to impose a local option sales tax. The proposed amendment, as currently drafted, imposes certain limitations on such an imposition. First, the authorization must outline the parameters and means of levying and collecting the tax. Second, the local option sales tax, the specific project or programs for which it is being imposed and its duration must be approved by a majority of the voters in the jurisdiction proposing the tax.

Notably, there are no prescribed limits upon the rate or scope of the tax, nor are there limits on what is included within the terms “projects” and “programs”. Thus, while the drafters intend the tax to have set limits, those limits likely will be tested.

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 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 local ordinance, the General Assembly and local government 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.