Case Name: Jonathan MILLER, Secretary of the Finance and Administration Cabinet of the Commonwealth of Kentucky; Commonwealth of Kentucky, Department of Revenue, Appellants/Cross-Appellees, v. JOHNSON CONTROLS, INC.; Security Group, Inc. and Subsidiaries, Including Sargent & Greenleaf, Inc.; Willis North America, Inc. and Affiliates; Bunzl USA, Inc. and Subsidiaries Including Mak-Pak, Inc.; Tredegar Corporation, Inc. and Subsidiaries; Cosmos Broadcasting Corporation and Affiliates, Appellees/Cross-Appellants
Court: Supreme Court of Kentucky
Jurisdiction: Kentucky
Decision Date: 2009-08-27
Citations: 296 S.W.3d 392
Docket Number: Nos. 2006-SC-000416-DG, 2007-SC-000819-DG
Parties: Jonathan MILLER, Secretary of the Finance and Administration Cabinet of the Commonwealth of Kentucky; Commonwealth of Kentucky, Department of Revenue, Appellants/Cross-Appellees, v. JOHNSON CONTROLS, INC.; Security Group, Inc. and Subsidiaries, Including Sargent & Greenleaf, Inc.; Willis North America, Inc. and Affiliates; Bunzl USA, Inc. and Subsidiaries Including Mak-Pak, Inc.; Tredegar Corporation, Inc. and Subsidiaries; Cosmos Broadcasting Corporation and Affiliates, Appellees/Cross-Appellants.
Judges: SCOTT and VENTERS, JJ., concur.
Reporter: South Western Reporter Third Series
Volume: 296
Pages: 392–423

Head Matter:
Jonathan MILLER, Secretary of the Finance and Administration Cabinet of the Commonwealth of Kentucky; Commonwealth of Kentucky, Department of Revenue, Appellants/Cross-Appellees, v. JOHNSON CONTROLS, INC.; Security Group, Inc. and Subsidiaries, Including Sargent & Greenleaf, Inc.; Willis North America, Inc. and Affiliates; Bunzl USA, Inc. and Subsidiaries Including Mak-Pak, Inc.; Tredegar Corporation, Inc. and Subsidiaries; Cosmos Broadcasting Corporation and Affiliates, Appellees/Cross-Appellants.
Nos. 2006-SC-000416-DG, 2007-SC-000819-DG.
Supreme Court of Kentucky.
Aug. 27, 2009.
Rehearing Denied Nov. 25, 2009.
C. Christopher Trower, Atlanta, GA, Laura Marie Ferguson, Department of Revenue, Office of Legal Services, Frankfort, KY, Counsel for Appellants/Cross-Appellees.
Bruce F. Clark, Erica Lynn Horn, Margaret R. Grant, Roger Benjamin Critten-den, Stites & Harbison, PLLC, Frankfort, KY, Paul H. Frankel, Morrison & Foer-ster, LLP, New York, NY, Counsel for Appellees/Cross-Appellants.
Thomas J. Luber, Mitzi Denise Wyrick, Wyatt Tarrant and Combs, LLP, Louisville, KY, Counsel for Amicus Curiae, Gan-nett Satellite Information Network, Inc.; Courier Journal and Louisville Times Co.; Gannett Direct Marketing Sendees, Inc.; Gannett River States Publishing Corp.; Courier Cellular Corporation; Computer Emporium; Courier Broadway Corp.

Opinion:
Opinion of the Court by
Justice NOBLE.
This appeal addresses the constitutionality and application of certain amendments to the corporate tax statutes passed by the General Assembly in 2000 that barred the filing of combined tax returns under the unitary business concept and the issuance of tax refunds related to such a filing, even if by amended return, for the years prior to 1995. The Appellants (and Cross-Ap-pellees) Jonathan Miller, et al., collectively on behalf of the Commonwealth of Kentucky, assert that the amended tax statutes satisfy all constitutional requirements, and that they were economic legislation enacted for a legitimate purpose, even though they disallow filing combined returns or collecting a refund thereon for the years before 1995. The Appellants also argue that the legislature effectively withdrew its consent to be sued for such refunds. Appellees (and Cross-Appellants) Johnson Controls, et al., argue that their due process rights will be violated if the 2000 amendments to the tax statutes are allowed to prevent them from getting a refund. They also claim denial of equal protection under the law and violation of other Kentucky Constitutional rights. Because we find that the tax statute amendments were enacted for the legitimate governmental purpose of regulating revenue, and that the amendments are rationally related to that purpose, there is no due process or other constitutional violation.
I. Background
A. Factual Background
Beginning in 1988, the Kentucky Revenue Cabinet began interpreting KRS 141.120 to disallow the filing of a combined tax return under the unitary business con cept. In Revenue Policy (RP) 41P225, the Cabinet determined to literally apply the language in KRS 141.120 which stated that such returns were disallowed. Prior to this, for sixteen years, the Cabinet had allowed qualified businesses to choose whether to file separate returns or a combined return under the unitary business concept. RP 41P225 made it clear that only separate returns would be allowed despite the fact that a group of corporations might function under a unitary business plan.
Many corporate enterprises function as clusters or chains of related corporations, often across many state lines. Determining how to apportion corporate income to allow for taxation in each state can be extremely difficult and can lend itself to tax "dodges" or fraud. One method to arrive at proper taxation for a specific part of a business chain is to simply tax each part separately. Another method, known as a combined return under a unitary business plan, lets the corporate entity file as a whole, then apportions the state tax according to some formula. There are pros and cons to both methods which are not germane here.
The Appellees originally filed separate tax returns. In 1994, this Court decided GTE v. Revenue Cabinet, Commonwealth of Kentucky, 889 S.W.2d 788 (Ky.1994), which held that related corporations (such as a parent and subsidiary) could file a combined tax return under the unitary business concept. After GTE was decided, the Appellees in this case sought to amend their returns by substituting combined returns under the unitary business concept as allowed in GTE, because they would owe less tax under such an approach and could therefore claim a refund of taxes they claim to have overpaid.
Recognizing that applying GTE would result in a significant and unanticipated revenue loss, the General Assembly repeatedly amended the relevant statutes to bar the type of combined returns under the unitary business plan that the Appel-lees amended to file, and to bar the payment of any tax refunds that would be due to persons filing this type of amended return. The Appellees claim these statutory amendments have denied them due process of law and violated equal protection.
B. Procedural and Legislative History of KRS 141.120 and KRS 141.200
Two statutes actually lie at the heart of this controversy: KRS 141.120 and KRS 141.200. Because they have been subject to significant amendment and shifting interpretations, some recounting of that history will be helpful in understanding this case.
1. Before 1996
GTE read the version of KRS 141.120 in effect at that time to "authorize multiple corporations engaged in a unitary business to file combined income tax returns." GTE, 889 S.W.2d at 791. As noted above, this meant that related corporations (e.g., a parent and subsidiary) could effectively file a single tax return. The Court so held despite the fact that KRS 141.200(1) at the time required that "[cjorporations that are affiliated must each make a separate return." The Court read "corporation" as used in KRS 141.200 to mean both individual corporations and groups of corporations that operated as a "unitary business." GTE, 889 S.W.2d at 793. This meant that GTE and its subsidiaries would be treated as a single business under the "unitary business concept" and they could therefore file a combined return.
2.The 1996 Amendments
The General Assembly amended KRS 141.120 substantially in 1996, directly in response to the Court's decision in GTE, with the change having retrospective effect to any tax year ending on or after December 31, 1995. See 1996 Ky. Acts ch. 239, § 1, 3. A section was added that read, "Nothing in this section shall be construed as allowing or requiring the filing of a combined return under the unitary business concept or a consolidated return." KRS 141.120(11).
KRS 141.200 was amended in its entirety, with its changes having retrospective effect to any tax year ending on or after December 31, 1995. See 1996 Ky. Acts ch. 239, § 2, 3. The "[cjorporations that are affiliated must each make a separate return" language was removed. In its place, the General Assembly included definitions of "affiliated group" and "consolidated returns," both of which referenced the federal Internal Revenue Code. The General Assembly also included language allowing "affiliated groups" to file "consolidated returns."
The effect of this legislation was to undo the "unitary business concept" injected into the law by GTE while allowing parent-subsidiary groups of corporations, like those involved in the GTE litigation, to file what amounted to a single return going forward from 1995. In other words, the General Assembly technically undid GTE, at least going forward, but implemented a substantially similar scheme under the "affiliated group" approach. This allowed the General Assembly to follow the national trend that GTE had recognized while giving it more control over the process than the judiciary.
3. The 1998 Budget Bill
Sometime in 1996 to 1998, the Revenue Cabinet realized that GTE's interpretation of KRS 141.120 was creating substantial tax refund liabilities for the state for the years prior to 1995. The General Assembly was not apprised of, or at least was not able to address, these problems until late in the 1998 Regular Session, when it was well into the budgeting process. Because legislative sessions were only held every other year then, the first chance to deal with the problem with direct legislation would come two years later. To at least temporarily patch the problem, the General Assembly inserted a provision in the 1998 Budget Bill barring the state treasury from paying out any refunds sought pursuant to the theory announced in GTE. The Budget Bill would only be in effect for two years, meaning the problem would have to be addressed fully in 2000.
4. The 2000 Amendments
In 2000, the General Assembly finally had a chance to deal directly with the emerging problem created by those corporations trying to file amended returns for years before 1995 to take advantage of GTE's interpretation of the version of KRS 141.120 in effect in those years.
It amended KRS 141.120 to remove the express bar on filings under the "unitary business concept" found in the 1996 version at KRS 141.120(11). See 2000 Ky. Act. ch. 543, § 2. This was not a rollback of the disapproval of the "unitary business concept," however.
Instead, the General Assembly again amended KRS 141.200 substantially to address the problem. See 2000 Ky. Act. ch. 543, § 1. The amendment added the following language:
(7) For any taxable year ending on or after December 31, 1995, except as provided under subsection (3) of this section, nothing in this chapter shall be construed as allowing or requiring the filing of:
(a) A combined return under the unitary business concept; or
(b) A consolidated return.
(8) No assessment of additional tax due for any taxable year ending on or before December 31, 1995, made after December 22,1994, and based on requiring a change from any initially filed separate return or returns to a combined return under the unitary business concept or to a consolidated return, shall be effective or recognized for any purpose.
(9) No claim for refund or credit of a tax overpayment for any taxable year ending on or before December, 31, 1995, made by an amended return or any other method after December 22, 1994, and based on a change from any initially filed separate return or returns to a combined return under the unitary business concept or to a consolidated return, shall be effective or recognized for any purpose.
(10) No corporation or group of corporations shall be allowed to file a combined return under the unitary business concept or a consolidated return for any taxable year ending before December 31, 1995, unless on or before December 22, 1994, the corporation or group of corporations filed an initial or amended return under the unitary business concept or consolidated return for a taxable year ending before December 22, 1994.
(11)This section shall not be construed to limit or otherwise impair the cabinet's authority under KRS 141.205.
KRS 141.200. The bill also had language stating that subsection (7) "shall apply retroactively for taxable years ending on or after December 31, 1995," and that subsections (8) to (11) "shall apply retroactively for all taxable years ending before December 31, 1995." 2000 Ky. Acts ch. 543, § 3.
The effect of this amendment was to maintain the bar on combined returns under the "unitary business concept" and to retrospectively apply that bar to years before 1995. Because thex-e was no alternative for filing "consolidated returns" for "affiliated groups" in those years, as had been allowed beginning in 1995 under the 1996 amendments, this new amendment pui'ported to undo any effect GTE might have had prior to 1995.
5. Subsequent Amendments
Subsequent amendments of KRS 141.120 and .200 left the 1996 and 2000 amendments substantially intact. Also, KRS 141.200 has been amended to include provisions i'elated to "affiliated groups" and "consolidated x-eturns" for the tax years 2004 to 2007. This has had the effect of moving KRS 141.200(7) — (11), as found in the 2000 version of the statute, to KRS 141.200(15) — (19). For present purposes, however, the law appears to be substantially the same as it appeai-ed in 2000.
II. Analysis
A. Sovereign Immunity
Appellants argued that Appellees cannot obtain a tax refund in this action from Revenue because the legislature withdrew its consent, specifically, to be sued for a refund under a combined return based on the unitary business plan in KRS 141.200(17). Certainly, that is the plain meaning of that section. However,
The constitutional privilege of a State to assert its sovereign immunity in its own courts does not confer upon the state a concomitant right to disregard the Constitution or valid federal law.
The States and their officers are bound by obligations imposed by the Constitution and by federal statutes that comport with the constitutional design....
Sovereign immunity does not bar all judicial review of state compliance with the Constitution and valid federal law.
Alden v. Maine, 527 U.S. 706, 755-56, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999).
The Appellees have raised a federal due process challenge to the 2000 amendments. As such, their federal constitutional claims must be considered under the Supremacy Clause. If there is a federal constitutional violation, that law prevails.
B. Due Process
The term "due process" has two meanings in American jurisprudence: (1) substantive due process, which is based on the idea that some rights are so fundamental that the government must have an exceedingly important reason to regulate them, if at all, such as the right to free speech or to vote; and (2) procedural due process, which requires the government to follow known and established procedures, and not to act arbitrarily or unfairly in regulating life, liberty or property. Since the Appellees have paid taxes and are seeking a refund by amending their separate returns to a combined return under the unitary business concept for the years in question, they claim a property interest will be taken without due process of law if the amended tax statutes are allowed retroactive application to bar their claims.
It has been established that "a taxpayer has no vested right in the Internal Revenue Code." United States v. Carlton, 512 U.S. 26, 33, 114 S.Ct. 2018, 129 L.Ed.2d 22 (1994). (Nor, by comparison, is there a vested right in the Kentucky Revenue Code.) By this statement, written by Justice Blackmun, the United States Supreme Court held that there is no substantive due process right which prevents retroactive tax law applications. The Supreme Court explained:
"Taxation is neither a penalty imposed on the taxpayer nor a liability which he assumes by contract. It is but a way of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must bear its burdens. Since no citizen enjoys immunity from that burden, its retroactive imposition does not necessarily infringe on due process.... "
Id. (quoting Welch v. Henry, 305 U.S. 134, 146-47, 59 S.Ct. 121, 83 L.Ed. 87 (1938)) (omission in original).
Having determined that matters involving taxation do not involve a fundamental right (and thus did not implicate substantive due process), the Supreme Court also undertook to determine whether retroactive application of a tax statute, without notice and causing loss to the taxpayer, would violate procedural due process. After a painstaking analysis, the Supreme Court determined that as long as the statutory amendment was rationally related to a legitimate legislative purpose, it would not violate due process.
The Supreme Court began its analysis by recognizing a number of cases wherein it upheld retroactive tax legislation against a due process challenge when the legislation was not so " 'harsh and oppressive as to transgress the constitutional limitation.' " Id. at 30, 114 S.Ct. 2018 (quoting Welch v. Henry, 305 U.S. 134, 147, 59 S.Ct. 121, 83 L.Ed. 87 (1938)). To explain "harsh and oppressive," the Court stated that these words were equivalent to "arbitrary and irrational," id., and explained:
" 'Provided that the retrospective application of a statute is supported by a legitimate legislative purpose furthered by rational means, judgments about the wisdom of such legislation remain within the exclusive province of the legislative and executive branches....
. The retrospective aspects of legislation, as well as the prospective aspects, must meet the test of due process, and the justifications for the latter may not suffice for the former.... But that burden is met simply by showing that the retroactive application of the legislation is itself justified by a rational legislative purpose.' "
Id. at 30-31, 114 S.Ct. 2018 (quoting Pension Benefit Guaranty Corporation v. R.A. Gray & Co., 467 U.S. 717, 729-30, 104 S.Ct. 2709, 81 L.Ed.2d 601 (1984)) (some internal quotation marks omitted, citations omitted, emphasis added, first and third omission in original).
The Respondent in Carlton had legitimately taken advantage of an estate tax deduction under a revised statute which would have saved the estate a significant amount of money. A little over a year later, Congress recognized that the statute was overbroad and enacted a curative amendment limiting the deduction to such a degree that it would no longer apply to the estate. It did so by making the amendment retroactive as if incorporated in the original deduction provision. The IRS disallowed the deduction, and Carlton paid the asserted deficiency, plus interest. He then filed a claim for a refund, and instituted a refund action in federal district court, claiming a due process violation. The district court rejected his due process argument. A divided panel of the Ninth Circuit Court of Appeals reversed on the grounds of inadequate notice of the retroactive amendment and that the taxpayer had relied to his detriment on pre-amendment law.
The Supreme Court found that Carlton's lack of notice was not dispositive because a taxpayer takes his chances that there will be an increase in the tax burden which might come about when the government carries out an established policy of taxation. Further, it held that since the amendment had not been made for an improper purpose, such as inducing Carlton to rely on the statute only to target him after the fact, and given that he had no immunity from taxation because it was neither a penalty nor a liability but only his obligation in exchange for the benefits of government, his reliance on the pre-amendment statute alone was insufficient to establish a constitutional violation.
Instead, the Supreme Court held the view of the Ninth Circuit Court of Appeals to be an unduly strict standard: "Because we conclude that retroactive application of the 1987 amendment to Section 2057 is rationally related to a legitimate legislative purpose, we conclude that the amendment as applied to Carlton's 1986 transactions is consistent with the Due Process Clause." Id. at 35,114 S.Ct. 2018. It is notable that this ultimate holding did not mention a "modesty" requirement (on which the Court of Appeals relied in this case), though the majority did note with favor that Congress had acted promptly and applied only a modest period of retroactivity (meaning that the length of the period of retroactivity is to be considered as part of the test of whether the statute is a rational means of achieving the government's goal).
In fact, only Justice O'Connor stated in her concurring opinion that the retroactivity period should not exceed one year, thus implying that she considered "modesty" to be a due process guarantee. Her separate opinion carried no other votes.
Justices Scalia and Thomas, in a separate concurring opinion, took the view that time is not even a relevant consideration. Instead, they focused on the fact that the taxpayer has already relied on the statute, and the amendment comes after that reliance. They felt that whether the amendment comes immediately after or long after does not change the fact of deprivation after reliance on then existing law. See id. at 40, 114 S.Ct. 2018 (Scalia, J., concurring) ("The reasoning the Court applies to uphold the statute in this case guarantees that all retroactive tax laws will henceforth be valid.").
Retroactive application of a statute need only be (1) supported by a legitimate legislative purpose (2) furthered by rational means, which includes an appropriate modesty requirement. This requires analysis of the facts and circumstances of each case, rather than applying a specified modesty period. The pertinent question is whether the period of retroactivity is one that makes sense in supporting the legitimate governmental purpose (rationally related).
Despite these differences, Justices O'Connor, Scalia and Thomas did concur in the result of the case, joining the majority in saying that retroactive application of revenue measures is rationally related to the legitimate governmental purpose of raising revenue, to prevent a "significant and unanticipated revenue loss." As Justice Scalia wrote in his separate concurring opinion,
To pass constitutional muster the retroactive aspects of the statute need only be "rationally related to a legitimate legislative purpose." Revenue raising is certainly a legitimate legislative purpose, and any law that retroactively adds a tax, removes a deduction, or increases a rate rationally furthers that goal. I welcome this recognition that the Due Process Clause does not prevent retroactive taxes, since I believe that the Due Process Clause guarantees no substantive rights, but only (as it says) process.
Id. at 40, 114 S.Ct. 2018 (Scalia, J., concurring) (internal citations omitted).
Clearly, eight of the nine justices viewed what may "rationally further" a legitimate governmental interest as being broader than the one year that only Justice O'Con-nor would impose as a "modesty" measure. Thus what is "modest" or acceptable for due process purposes depends on the facts of the case, including notice, settled expectations, detrimental reliance, etc.
This was demonstrated when, following Carlton, in 1996 the Ninth Circuit (where Carlton originated) held in Montana Rail Link, Inc. v. United States, 76 F.3d 991 (9th Cir.1996), that a statute with a seven year retroactivity period did not violate due process. The facts of that case are strikingly similar to this one.
Montana Rail was required to pay an excise tax on compensation it paid to its employees, and to withhold a tax imposed on railroad employees under a retirement system separate from social security though paid to the Internal Revenue Service. For several years, Montana Rail treated as taxable compensation its contributions to 401 (k) plans, but on advice of the Railroad Retirement Board, stopped including 401 (k) contributions when calculating the amount of employee compensation for retirement fund purposes in 1987 and 1988. This resulted in what it considered to be a tax overpayment for those years, so Montana Rail refunded that amount to its employees, and sought a refund of this overpayment from the government.
In December 1989, Congress redefined the railroad retirement tax compensation base to specifically include contributions to 401(k) plans as part of the taxable compensation, and specifically made the change retroactive to " 'remuneration paid before January 1, 1990Id. at 993 n. 1 (quoting Omnibus Budget Reconciliation Act of 1989, § 10206(c)(2)(A)). This affected the tax status of these retirement contributions from 1983, when the ambiguity arose, forward. Montana Rail's refund request was denied. But it claimed that it had relied on the advice of the Board and the then existing state of the law, and that to deny its refund would violate due process. Montana Rail filed suit in federal district court seeking the refund, but its claim was denied there also.
The Ninth Circuit Court of Appeals upheld the district court ruling, specifically applying Carlton to find that Congress had the legitimate legislative purpose of protecting the reliance interests of employees who were expecting to receive higher benefits based on the taxes paid and withheld, and to avoid loss of revenue. It specifically held that the period of retroactivity bore a rational relation to the underlying legislative purpose, and that the seven year retroactivity period was appropriate because
[gjiving § 10206(b) a one or two year period of retroactivity would have severely hurt workers who had retired expecting that they would receive a level of benefits based in part on tax payments made from 1983 through 1987. A shorter period of retroactivity would have been arbitrary and irrational.
Id. at 994 (internal citations omitted).
Further the Ninth Circuit pointed out that
MRL erroneously equates its mistaken overpayment of taxes with the government's "unlawful," "improper" and "erroneous" collection of taxes. Contrary to MRL's assertion, the IRS did not violate any federal law by accepting MRL's overpayment. Seeking a refund for one's own voluntary overpayment of a lawful tax is not the same as pursuing a remedy for payment of an illegal tax.
Id. at 995.
In light of Carlton and Montana Rail it becomes clear that the opinion of the Kentucky Court of Appeals gave undue weight to dicta in Justice O'Connor's concurring opinion when it held that this case turned on a one year "modesty" requirement. The issue instead is only whether the retroactive statute of 2000 rationally furthers the legitimate governmental purpose of raising and controlling revenue to prevent a significant and unanticipated revenue loss. Applying that test here, there can be no question that the legislature acted to correct what it viewed as a mistake in GTE's interpretation of the law, that it had a legitimate governmental purpose (raising and controlling revenue) and that the statute rationally furthers this purpose. Further, to prevent a significant and unanticipated revenue loss, Appellees had been on notice of the revenue intent from 1988 when RP 41P225 was issued until 1994 when GTE was decided, and could not have had any "settled expectations" to the contrary.
Additionally, the legislature's intent to supercede GTE became apparent almost immediately. In the 1996 session, the legislature amended KRS 141.120 to disallow filing a combined return under the unitary business concept, and developed its own approach to filing a consolidated return based on affiliation, specifically ownership. It made the statute effective for any tax year ending on or after December 31, 1995. That taxpayers would attempt to amend their returns to combined returns under the unitary business concept in order to claim under the refund statute was literally an unknown, because the legislature had no means of knowing who would wish to combine their separate returns in order to request a refund, or even if a refund would be required after they did.
By the beginning of the next biennial legislative session the effect of GTE was still not clear. Sometime during the session, however, evidence of such claims was raised, and the problem was addressed through the budget bill, which directed Revenue not to pay refunds on attempts to amend separate returns to combined returns under the unitary business concept in order to make a claim for a refund under GTE. By the 2000 session, the problem had been defined, and the legislature amended KRS 141.200 to disallow the filing of combined returns under the unitary business concept for any taxable year ending on or before December 31,1995, and to disallow the payment of refunds on amended returns filed after December 22, 1994, (not coincidentally, the date GTE was decided). At the first reasonable opportunity, as it became aware of the issues, the legislature, which met then only biennially, made provisions and amendments.
While it might be tempting to require the legislature to be omniscient so as to immediately understand the ramifications of case law on statutory application, history tells us that often the development of law based on the holdings in cases takes time to go through process before the clear impact can be seen. Combine this with delays caused by a biennial legislative schedule, and it is rational that the legislature acted with reasonable diligence in this complicated matter.
As Carlton held, to pass constitutional muster, a retroactive statute need only be rationally related to a legitimate legislative purpose, which in this case as in Ca.rlton was a significant and unanticipated revenue loss. Revenue raising is the sole province of the legislature, and the courts should involve themselves in it only when clear constitutional or interpretive issues arise. While due process is certainly a constitutionally protected right, it is not impacted under the facts of this case, given the clear and lengthy notice, the lack of settled expectations and lack of detrimental reliance. All the legislature did was clarify the statute after this Court interpreted it in GTE.
Taking another tack, Appellees have argued that in a case decided before the Supreme Court later in 1994, the Court ruled that a State may not "bait and switch" remedies when a taxpayer seeks a refund of illegally or unconstitutionally collected taxes which require this Court to find that they are entitled to a refund of an overpayment of taxes due to being required to file separate returns when they were entitled to file a combined return under the unitary business plan. Reich v. Collins, 513 U.S. 106, 115 S.Ct. 547, 130 L.Ed.2d 454 (1994). This case, however, is clearly distinguishable from the present circumstances on its facts and legal questions.
Reich concerned a common practice where state retirement benefits were exempt from state income taxes, but federal retirement benefits were not. After the Supreme Court found that this practice violated the constitutional intergovernmental tax immunity doctrine, most states repealed the special tax exemption for state retirees, but did not automatically refund the illegal taxes to federal retirees. Reich sued Georgia for a tax refund under its refund statute. The case took several twists and turns, but finally ended up with the United States Supreme Court holding that Georgia could not change its deprivation remedy in the middle of the stream by arbitrarily declaring that its clear post- deprivation remedy would no longer apply because it was going to exclusively rely on its pre-deprivation remedy. Justice O'Connor wrote that Reich was entitled to pursue the post-deprivation remedy, regardless of whether Georgia also had pre-deprivation remedies, because the language in the refund statute would lead the average taxpayer to think it obvious that he could avail himself of that remedy. Georgia had effectively taken away any remedy at all by changing to its pre-depri-vation remedies exclusively after Reich had already paid the unconstitutional taxes.
The Reich decision followed McKesson Corp. v. Division of Alcoholic Beverages and Tobacco, Dept. of Business Regulation of Florida, 496 U.S. 18, 110 S.Ct. 2238, 110 L.Ed.2d 17 (1990), which dealt with an attempt by Florida to tax certain types of Florida products more favorably than other products that had been found to be unconstitutional as a violation of the Commerce Clause. The Florida Supreme Court had recognized the unconstitutionality, but had declared that relief would be prospective only, and did not allow a refund to the challengers. Reversing this, Justice Brennan wrote for a unanimous court
If a State places a taxpayer under duress promptly to pay a tax when due and relegates him to a postpayment refund action in which he can challenge the tax's legality, the Due Process Clause of the Fourteenth Amendment obligates the State to provide meaningful backward-looking relief to rectify any unconstitutional deprivation.
Id. at 31, 110 S.Ct. 2238 (footnote omitted, emphasis added).
It is important to note that the Supreme Court made its ruling in McKesson premised upon a refund being due for an unconstitutional application of a tax, which naturally impacts federal due process. However, this Court in GTE did not make a constitutional declaration, but instead merely interpreted a constitutional statute. That decision did not in any way impact the process for a remedy available to the taxpayers; it merely said that another process for filing returns was also available. Since constitutionality was not involved, the analysis then goes from deprivation of property without due process of law to the well-established analysis of when and how the government may enact economic legislation, specifically revenue-controlling legislation, under the Carlton line of cases.
The present case differs from Reich and McKesson in many important ways. Here, Appellees claim that their right to file a combined return under the unitary business concept pursuant to the holding in GTE was improperly taken from them. They filed for a refund under GTE's interpretation of the statute, but in order to be eligible to get a refund, they had to change their return from separate returns to a combined return under the unitary business concept, which required taking the paperwork of several different returns and combining them into one return. Only after this was done would Appellees become eligible for a refund. While they may have been denied them choice of the most advantageous return, the returns that they did file were not illegal, and certainly could have been the chosen method, even under GTE, if they would have been to the Appellees' advantage. In Montana Rail the Ninth Circuit made this same point, distinguishing that case from Reich, in upholding a law that was very similar in effect to this one.
The most significant difference, however, is that Reich and McKesson did not involve the retroactive application of a state tax statute that effectively changed the amount of tax owed and which was enacted for a legitimate governmental purpose. While Reich came out the same year as Carlton, the cases are on two entirely different issues. Where the state of Georgia arbitrarily took away a "clear and certain" post-deprivation remedy for taking undisputedly illegal taxes in Reich, the legislature in this case took away the dispute, and hence any illegality that might be claimed, by properly enacting a retroactive statute that mooted the question of whether the Appellees were entitled to a refund. By retroactively declaring that combined returns were disallowed pri- or to 1995 and that no refunds would be allowed due to amendments to file combined returns under a unitary business concept, the legislature reestablished the status quo as it saw it prior to GTE. The remedy provided by the refund statute was not affected at all; it simply no longer applies to the Appellees in this case because the underlying tax law has been changed, just as the deduction no longer applied in Carlton.
C. Equal Protection and Other Rights
The Appellees also argue that the tax amendments violate their equal protection rights and other rights under the Kentucky Constitution because other corporations were allowed to amend their returns and were granted tax refunds. However, the controlling fact in this case is the government's power to tax and to enact legislation that controls the revenue stream. Since a taxpayer has no immunity from taxation, which is not a contractual liability but rather the shared costs of the benefits of government, no fundamental right is involved. Carlton, 512 U.S. at 33-34, 114 S.Ct. 2018. Rather, statutes or practices that have the effect of distinguishing between entities solely on an economic basis are "presumed to be valid and . generally comply with federal equal protection requirements if the classifications that they create are rationally related to a legitimate state interest." Durham v. Peabody Coal Co., 272 S.W.3d 192, 195 (Ky.2008) (citing City of Cleburne, Texas v. Cleburne Living Center, 473 U.S. 432, 440, 105 S.Ct. 3249, 87 L.Ed.2d 313 (1985)). The analysis is the same under the Kentucky Constitution. Id. This "rational basis" test is the same as required under due process for economic legislation, and, as discussed above, the 2000 amendments to the tax statute clearly satisfy it. The question in all matters falling short of a fundamental right, and particularly to economic or taxation legislation, is whether there is a legitimate governmental purpose for the action, and whether the means used to accomplish it rationally relates to that purpose. Having found that such a purpose exists in this case, there is no merit to the Appellees' claims.
III. Conclusion
Because the amendments to the Kentucky tax code made by the legislature in 1996 and 2000 were made to clarify the law in regard to combined returns under the unitary business plan and to exercise its revenue-raising powers, they further a legitimate governmental purpose. Moreover, the amendments were rationally related to that purpose. Consequently, Ap-pellees' due process rights have not been impacted and they are not entitled to tax refunds because they could not amend their separate returns to a combined return under the unitary business plan. The opinion of the Court of Appeals is reversed.
SCOTT and VENTERS, JJ., concur.
SCHRODER, J., concurs in result only by separate opinion.
ABRAMSON, J., dissents by separate opinion in which CUNNINGHAM, J., joins.
MINTON, C.J., not sitting.
. Specifically, the Court stated:
Although we recognize the argument by the Revenue Cabinet that KRS 141.200(1) requires separate corporate filings, we do not agree with the interpretation placed on the last sentence of that statute. "Corpora-lions" is defined by KRS 141.010(24) as having a meaning consistent with the definition of the word in § 7701(a)3 of the Federal Internal Revenue Code. 26 U.S.C. 7701. The concept of apportionment among states obviously has no place within the confines of the Federal tax plan. Our interpretation of the word "Corporation" as used in KRS 141.200(1) is, however, consistent with the Federal definition. We interpret the last phrase of § 1, which is "corporations that are affiliated" to refer to unitary corporations such as GTE and Subsidiaries. The statute merely requires that each unitary corporation file a separate corporate income tax return. It does not mean that each component corporation of the unitary group must file separately. The taxation statutes differentiate between simple corporations and unitary corporations. This statute simply requires a return for both classes of corporate taxpayers.
GTE, 889 S.W.2d at 792-93.