Opinion ID: 1676180
Heading Depth: 1
Heading Rank: 3

Heading: The Bank Deposits Tax

Text: We first turn to the issue of the tax on bank deposits. It is clear to this Court that KRS 132.030 changes the rate of taxation on domestic bank accounts as compared to those accounts held in institutions located out-of-state. Appellants assert that this provision is violative of the equal protection provisions of both the Kentucky and U.S. Constitution as well as the Commerce Clause. The questions regarding violations of equal protection principles have already been addressed by the United States Supreme Court in Madden v. Commonwealth of Kentucky, 309 U.S. 83, 60 S.Ct. 406, 84 L.Ed. 590 (1940). This Court concludes that Madden is dispositive and controlling, and therefore reversal is not warranted on this issue. In Madden , Kentucky created two different classes of people, those who had accounts in Kentucky banks and those who had deposits in out-of-state institutions. The United States Supreme Court concluded that the state had a legitimate purpose when taxing out-of-state accounts at a higher rate due to the expense of collecting taxes on those accounts. Therefore, the Court held that the bank deposits tax did not violate the equal protection clause. The same reasoning applies in this case. Appellants urge this Court to recognize that the United States Supreme Court's holding in Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751 (1985), heightened the standard applied in Madden in fact situations similar to the one under review. Appellants characterize Metropolitan Life Ins. as follows: We hold that under the circumstances of this case, promotion of domestic business by discrimination against nonresident competitors is not a legitimate state purpose. Id. at 882, 105 S.Ct. at 1683. However, this court understands that the purpose of the higher tax on out-of-state bank deposits is to cover the increased costs of collection of that tax. This classification of taxable groups is not based solely upon an in-state/out-of-state characterization as appellants assert. As a result, this court cannot hold that this tax is violative of the equal protection clause. Appellants also urge this Court to conclude that the bank deposits tax fails under Kentucky Constitution sec. 171. Appellant maintains that the bank deposits tax is not uniform upon all property of the same class. Kentucky Constitution, sec. 171. In order for this tax to satisfy the mandate of sec. 171 of the Kentucky Constitution, the classification which distinguishes in-state accounts from out-of-state accounts must not be artificial, arbitrary [or] unreasonable. Gillis v. Yount, Ky., 748 S.W.2d 357, 363 (1988). To make this determination, we must decide whether the classification is . . . related to the constitutionally permissible classification for tax purposes. id. The purpose of this distinction is related to the increased costs of the tax collection on out-of-state accounts. We find this classification depend[s] upon natural, real [and] substantial distinctions, inhering in the subject matter, such as suggest the necessity for . . . independent legislation in regard to the class specified. Gillis, 748 S.W.2d at 363, quoting Bd. of Educ. of Jefferson Co. v. Bd. of Educ. of Louisville, Ky., 472 S.W.2d 496, 498 (1971). Therefore, KRS 132.030 does not violate the Kentucky Constitution. Next, we turn to the question of the commerce clause and its effect on the validity of this statutory provision. After undertaking a constitutional analysis of this issue, the Court of Appeals concluded that the tax was constitutional and not in violation of the commerce clause. This holding was based upon the premise that the commerce clause did not apply to the bank deposits tax because bank deposits do not constitute interstate commerce. The Court of Appeals stated: All objects of interstate trade merit Commerce Clause Protection; none is excluded by definition at the outset. City of Philadelphia v. New Jersey, 437 U.S. 617, 622, 98 S.Ct. 2531, 2534, 57 L.Ed.2d 475, 480 (1978). It complements reason that if the object being taxed is not one of interstate trade the commerce clause will not apply. . . . [T]he imposed tax herein is not on an object of interstate trade, it is an ad valorem property tax on bank deposits. While it seems likely that a deposit in a bank established in several states would be an object in interstate commerce, there is no possibility of that here. The Court of Appeals determined that KRS 287.030(3) prohibits the finding that these deposits are objects of interstate commerce. The statute states: No bank incorporated under the laws of another state or national bank having its principal place of business outside this state shall transact any banking business in this state except to lend money. KRS 287.030. This Court cannot agree with this conclusion. While it may be tempting to ascertain that because of this statute, the deposits are not items of interstate commerce, the purposes of the United States Constitution may not be thwarted. This Court recognizes that we must enforce constitutional limitations. [W]e must apply the Constitution . . . for to do otherwise would breach the social compact which binds us one to another and would amount to an abdication of judicial responsibility. Fischer v. State Board of Elections, Ky., 879 S.W.2d 475 (1994). There is no question but that deposits made by in-state residents in banks located out-of-state are anything but interstate transactions, falling under the protective realm of the commerce clause. The language of KRS 287.030 has no effect on what transactions may occur between in-state residents and out-of-state banks, at the initiation of the resident. This in and of itself is the transaction in interstate commerce that is affected by imposition of the statutory modification of the tax rate. It is clear that this statute imposes a tax [differential] which discriminates against interstate commerce . . . by providing a direct commercial advantage to local business. Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 459, 79 S.Ct. 357, 362, 3 L.Ed.2d 421 (1959). This situation is not unlike the one considered in the United States Supreme Court's review in the case of Boston Stock Exchange v. State Tax Commission, 429 U.S. 318, 97 S.Ct. 599, 50 L.Ed.2d 514 (1977). The holding in Boston Stock Exchange involved a New York state statute which imposed a tax on transfers of securities. The tax was higher on in-state transfers resulting from out-of-state sales than transfers resulting from in-state sales. The United States Supreme Court held that this tax violated the commerce clause of the Federal Constitution. The violation occurred because the tax created an advantage for in-state stock exchanges and a discriminating burden on interstate commerce. The Court reasoned that the tax, in effect, foreclosed a consumer's ability to make tax-neutral decisions regarding their interstate transactions. The Boston Stock Exchange decision rests on the notion that investment funds are items in interstate commerce. Bank deposits are investment funds, and therefore, items in interstate commerce. In this case, KRS 132.030 creates the same situation with regard to placement of bank deposits. Residents making a choice of where to deposit funds will be influenced by the higher tax rate on out-of-state deposits. As a result, the statute forecloses tax-neutral decisions and creates both an advantage for the [banks in Kentucky] and a discriminatory burden on commerce to its sister States. Boston Stock Exchange, 429 U.S. at 331, 97 S.Ct. at 608. Since this Court is bound by constitutional proscriptions, we hold that the bank deposits tax is clearly violative of the commerce clause.