Commonwealth of Kentucky Court of Appeals

Transcription

1 RENDERED: FEBRUARY 26, 2016; 10:00 A.M. NOT TO BE PUBLISHED Commonwealth of Kentucky Court of Appeals NO CA MR INTERSTATE GAS SUPPLY, INC., FOR THE USE AND BENEFIT OF TRI-STATE HEALTHCARE LAUNDRY, INC. APPELLANT APPEAL FROM FRANKLIN CIRCUIT COURT v. HONORABLE THOMAS D. WINGATE CIVIL ACTION NO.12-CI COMMONWEALTH OF KENTUCKY, FINANCE AND ADMINISTRATION CABINET, DEPARTMENT OF REVENUE; and KENTUCKY BOARD OF TAX APPEALS APPELLEES OPINION REVERSING ** ** ** ** ** BEFORE: ACREE, CHIEF JUDGE; JONES AND NICKELL, JUDGES. JONES, JUDGE: This appeal requires us to consider whether Section 170 of the Kentucky Constitution exempts an institution of purely public charity from the tax

2 otherwise mandated by Kentucky Revised Statute (KRS) Having carefully reviewed the relevant authorities, we must REVERSE. I. BACKGROUND Interstate Gas Supply, Inc. ( IGS ) is an Ohio for-profit corporation headquartered in Dublin, Ohio. IGS sold natural gas to Tri-State Healthcare Laundry, Inc. ( Tri-State ). Tri-State is a company located in Kenton County that provides laundry services to several non-profit hospitals in Northern Kentucky. Tri-State purchased all the natural gas it used in its business in Kentucky from IGS. The Revenue Cabinet, Division of Local Valuation, Department of Property Valuation, by letter dated December 21, 1998, determined that Tri-State was an "institution of purely public charity" as that term is used in Section 170 of the Kentucky Constitution. Pursuant to KRS , IGS collected use taxes on the natural gas it sold to Tri-State. Those taxes were then paid to the Commonwealth of Kentucky. On October 20, 2009, Tri-State and IGS timely filed a form 51A209 (Sales and Use Tax Refund Application) claiming a refund for the use tax on the basis that Tri-State was exempt from use taxes under Section Citing Children s Psychiatric Hospital v. Revenue Cabinet, 989 S.W. 2d 583 (Ky. 1999) ( Children s Psych. ), the Finance and Administration Cabinet, Department of Revenue ("Cabinet") denied the refund request on the basis that the Section 170 exemption did not apply to the use tax. 1 The amount requested was $99, plus interest thereon. 2

3 Appellant timely protested the Denial Letter and filed a Supporting Statement as required by KRS (1) in support of its Protest. The Cabinet issued Final Ruling No on August 25, 2010, denying the protest. Appellant timely appealed the Final Ruling Letter by filing a Petition of Appeal to the Kentucky Board of Tax Appeals ( KBTA ). On June 20, 2012, the KBTA upheld the Department s final determination denying the refund request. The Appellant appealed the KBTA s ruling to the Franklin Circuit Court. The Circuit Court affirmed, holding that under Children s Psych., supra, the Section 170 exemption is limited to property taxes and does not apply to exempt use taxes. This appeal followed. II. STANDARD OF REVIEW This case presents an issue of law. Whether Kentucky Constitution Section 170 exempts institutions of purely public charity from the use tax otherwise mandated by KRS is purely a question of constitutional and statutory interpretation. Accordingly, our review is de novo. See Freeman v. St. Andrew Orthodox Church, Inc., 294 S.W.3d 425, 428 (Ky. 2009). 3

4 III. ANALYSIS The sole issue for our resolution on appeal is whether Section 170 of the Kentucky Constitution exempts Tri-State, an institution of purely public charity, from paying the excise tax otherwise required pursuant to KRS Kentucky Constitution Section 170 provides in pertinent part: Ky. Const. Section 170. There shall be exempt from taxation public property used for public purposes; real property owned and occupied by, and personal property both tangible and intangible owned by, institutions of religion, institutions of purely public charity, and institutions of education not used or employed for gain by any person or corporation, and the income of which is devoted to the cause of education For approximately a century, Kentucky courts took the approach that Section 170 exempted institutions of purely public charity from all revenue raising taxes. In Corbin Young Men's Christian Ass'n v. Commonwealth, 205 S.W. 388, 388 (Ky. 1918), the Court ruled that Section 170 exempted the YMCA from 2 KRS imposes an excise on the storage, use, or other consumption of certain tangible personal property and digital property within this Commonwealth. It provides as follows: Id. (1) An excise tax is hereby imposed on the storage, use, or other consumption in this state of tangible personal property and digital property purchased for storage, use, or other consumption in this state at the rate of six percent (6%) of the sales price of the property. (2) The excise tax applies to the purchase of digital property regardless of whether: (a) The purchaser has the right to permanently use the goods; (b) The purchaser's right to access or retain the digital property is not permanent; or (c) The purchaser's right of use is conditioned upon continued payment. 4

5 paying a fee to obtain a restaurant license. In so ruling, the Court explicitly held that Section 170's exemption extended to all revenue raisings measures by the State irrespective of whether they were levied directly on the institution's property: Being of the opinion that an institution of purely public charity, as it is agreed that appellant is, is by our Constitution exempt, not only from the payment of ad valorum or property taxes, but also from the operation of any and every revenue-producing measure upon such of its activities as are confined to, and not inconsistent with, the charitable purposes for which it was organized, it results that appellant is not liable to the payment of a restaurant license tax under section 4224, and the judgment is therefore reversed. Id. at 390. This remained the law until 1999 when the Kentucky Supreme Court confronted the constitutionality of a hospital provider tax the Commonwealth sought to impose on hospitals and physicians throughout the state. See Children's Psych., 989 S.W. 2d at 583. Therein, several hospitals claiming to be institutions of purely public charity argued that imposition of the provider tax on them violated Section 170. The Supreme Court of Kentucky ultimately concluded that the tax did not violate Section 170. In so holding, the Court examined the scope of Section 170 as related to institutions of purely public charity and concluded that it applied only to exempt ad valorem taxes. Id. at 586. The Court acknowledged that its decision was at odds with Corbin, but labeled Corbin as an "aberration" and not applicable to the hospital provider tax. Id. 5

6 The Cabinet argues that Children's Psych. is dispositive because KRS is an excise tax, not a property tax. We agree with the Cabinet that the tax is an excise tax. Even so, the imposition of the excise tax in question has been held to violate Section 170 because it functions like a property tax. In the case of Commonwealth ex rel. Luckett v. City of Elizabethtown, 435 S.W.2d 78 (Ky. 1968), the Court was asked to decide whether the City of Elizabethtown was liable for the use tax under KRS in relation to certain items of equipment the City purchased outside of the state. The City argued that it was not liable for the tax because Section 170 of the Kentucky Constitution exempts "from taxation public property used for public purpose." The Revenue Commission argued the City was not exempt because the Kentucky Constitution applied only to ad valorem taxes and the tax at issue was an excise tax. Although the Court classified the tax as an excise tax on the use of goods, rather than a property tax on the goods themselves, it still held that imposition of the tax violated Section 170 because the tax, regardless of its label, functioned as a property tax. The Court held: "It is our opinion that the tax levied by KRS is an excise tax the incidence of which is so similar to that of an ad valorem tax as to render its enforcement against cities unconstitutional." Children's Psych. placed institutions of purely public charity in the same position as governmental units with respect to tax exemptions, i.e., the exemption is limited to ad valorem taxes. The current law in Kentucky is that the use tax imposed under KRS is similar enough to an ad valorem tax to 6

7 render its enforcement on governmental entities unconstitutional under Section 170. We see no reason why the rule should be applied differently with respect to institutions of purely public charity. The tax in Children's Psych. was a "provider tax" on doctors, hospitals, and other health care "providers" ranging from 2 percent to 2.5 percent of the gross revenues of physicians and hospitals. Such revenues are generally generated by the rendering of services from the hospitals to patients, not the acquisition or use of property. Thus, there could be no argument that the tax functioned in any way similar to a property tax. In this case, however, Tri-State argues that even if the Section 170 exemption is limited to property taxes, the use tax functions like a tax on its property. We find no indication that Children's Psych. can be read to either explicitly or implicitly overrule City of Elizabethtown. Accordingly, we must agree with Tri State. Even though the use tax set out in KRS is an excise tax, based on City of Elizabethtown, we hold that it functions sufficiently like a property tax so as to violate Section 170 as applied to institutions of purely public charity. IV. Conclusion For the reasons set forth above, we REVERSE the order of the Franklin Circuit Court. 7

8 ALL CONCUR. BRIEF FOR APPELLANT: Timothy J. Eifler Stephen A. Sherman Louisville, Kentucky BRIEF FOR APPELLEES: Bethany Atkins Rice Frankfort, Kentucky 8