Court Opinion

ID: 9766781
Source: CourtListenerOpinion
Date Created: 2023-08-29 04:58:55.962705+00
Date Added: 2024-06-11T07:30:26.097966
License: Public Domain

CLAY, Commissioner.
This controversy involves the constitutionality of an ordinance of the City of Lexington, enacted February 5, 1970, imposing upon hotel and motel owners, and others similarly engaged, what purports to be a “license” tax fixed at 5% of the rental charged for the occupancy of rooms. The Chancellor held the ordinance unconstitutional on two grounds. He concluded the tax was an excise tax which cannot be levied in view of section 181 of the Kentucky Constitution, but, if it was a license tax, it would violate the public policy of the state against double taxation.
For some time the city has had an ordinance imposing upon business enterprises generally an annual license tax in the amount of 1½% of the net profits of the business. The tax in question purports to levy an additional license tax upon those in the hotel and motel business. Insofar as pertinent here, the questioned ordinance provides:
“Section 3. On and after February 28, 1970, there is hereby imposed a room tax of five per cent (5%) of the rental for every occupancy of a suite, room or rooms, charged by all persons, companies, corporations and other like or similar persons, groups, or organizations doing business as Motor Courts, Motels, Hotels, Inns and like or similar accommodation businesses. Every person, association, corporation or other like or similar persons engaged in the business of Motor Courts, Motels, Hotels, Inns and like or similar accommodations shall pay to the Treasurer of the City of Lexington, Kentucky, as collecting officer of said city, the tax hereinabove imposed.”
“Section 7. The license tax imposed by this ordinance, on the trade set forth, shall be in addition to such other tax or taxes levied or imposed generally on all occupations, trades or professions.” (Emphasis added)
This ordinance was designed to produce additional revenue for general city purposes, and it is not questioned that a license tax properly may be a revenue measure (rather than a regulatory one).
The legislature, which it is authorized to do under section 181 of the Kentucky Constitution, by KRS 92.280 and 92.281 granted cities (including Lexington) authority to impose license fees or taxes.1 See City of Harrodsburg v. Devine, Ky., 418 S.W.2d 426 (1967). It has been recognized, and is here conceded, that this authority does not permit such cities to levy excise taxes. See City of Louisville v. Sebree, 308 Ky. 420, 214 S.W.2d 248 (1948), and George Wiedemann Brewing Co. v. City of Newport, Ky., 321 S.W.2d 404 (1959).
Our first question is whether the additional tax on hotels and motels, even though designated a “license” tax, is in essence an “excise” tax which cities cannot levy. The label is not controlling. City of Louisville v. Sebree, supra. Section 181 of the Kentucky Constitution empowers the General Assembly to levy “a special or excise tax”, but this same section provides that such legislative body may authorize cities to “impose and collect license fees on * * * franchises, trades, occupations and professions”. As consistently construed, the latter does not encompass “excise” taxes.
Exactly what the framers of the Constitution had in mind when they drafted sec*255tion 181 has caused difficulty. When the words “or a special or excise tax” (which the General Assembly was empowered to impose) were added to the section by amendment, there was no discussion of the purpose or their meaning-. Debates, Constitutional Convention 1890, Vol. 2, page 2795. The word “excise” is a term of very general signification. Booth’s Ex’r v. Commonwealth, 130 Ky. 88, 113 S.W. 61 (1908). In State Tax Commission v. Hughes Drug Co., 219 Ky. 432, 293 S.W. 944 (1927), the opinion quotes from Ruling Case Law the following (page 945 S.W.):
“ ‘Excises, in their original sense, were something cut off from the price paid on a sale of goods, as a contribution to the support of the government. The word has, however, come to have a broader meaning and includes every form of taxation which is not a burden laid directly upon persons or property; in other words, excise includes every form of charge imposed by public authority for the purpose of raising revenue upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation.’ ”
We have recognized that a license tax is an excise tax. Shanks v. Kentucky Independent Oil Co., 225 Ky. 273, 8 S.W.2d 383, 385 (1928); Shannon v. Streckfus Steamers, 279 Ky. 649, 131 S.W.2d 833 (1939) .2 As the Chancellor aptly observed, in substance a true license tax is a permissible form of excise tax which cities may be authorized to levy under section 181 of the Kentucky Constitution. It is apparent that the drafters of the document, when in effect denying cities the right to impose an “excise” tax, were not using the term in the broad sense which would encompass a license tax, but were using it in the narrower sense to characterize a tax upon a transaction involving the sale, use or transfer of property. In City of Louisville v. Churchill Downs, 267 Ky. 339, 102 S.W.2d 10, page 13 (1937), we said:
“ * * * an excise tax is in its proper sense ‘something cut off from the price paid on a sale of goods as a contribution to the support of the government.’ ”
This concept was confirmed in Shanks v. Kentucky Independent Oil Co., 225 Ky. 303, 8 S.W.2d 383 (1938), and Shannon v. Streckfus Steamers, 279 Ky. 649, 131 S.W.2d 833 (1939). It may be observed here that a sales tax is a classic example of an excise tax. Maloney Davidson Co. v. Martin, 274 Ky. 449, 118 S.W.2d 708 (1938); Commonwealth ex rel. Luckett v. City of Elizabethtown, Ky., 435 S.W.2d 78.
It is contended by the taxpayers, and the Chancellor so found, that the tax in question was not truly a license tax but was an excise tax of the kind a city may not levy. This conclusion is apparently based on the theory that the tax is a charge upon room-rental transactions, which equate with the sale of commodities. From a technical standpoint section 3 of the ordinance in question does appear to levy a tax upon the transaction of renting property. It starts out by imposing “a room tax”. A rational analysis of this section, however, makes it rather clear that the tax is upon the hotel and motel owner and is simply measured by a percentage of room-rental receipts. The general license tax of the city is measured by a percentage of net income. Specifying the source of income does not necessarily convert a tax upon a business enterprise into a tax upon the transactions involved.
In City of Louisville v. Churchill Downs, 267 Ky. 339, 102 S.W.2d 10 (1937), in differentiating between a license tax and an excise tax, this court considered a significant incident of the latter was the fact that the impact of the tax was primarily upon *256the patron or the customer. Therein the tax, equal to 3% of the gross receipts, was imposed upon persons operating places of amusement or entertainment, but the statute required its collection from the purchaser of tickets of admission. This was held to be an excise tax as distinguished from a license tax. While the tax here in question probably would be passed on to the occupants of rooms, the tax is not upon the rental transactions.
It may be noted that the nature of this tax is quite similar to the one questioned in Second Street Properties v. Fiscal Court of Jefferson County, Ky., 445 S.W.2d 709 (1969). Though the constitutionality of the Act involved was vigorously attacked, no contention was made that the tax was invalid as an “excise” rather than a “license” tax. While this avenue of attack may have been inadvertently overlooked, we are inclined to believe the qustion was not presented because it was lacking in merit, which comports with our view. We conclude the tax here under consideration properly may be characterized a permissible license tax which the City of Lexington could impose upon a business enterprise and is not an excise tax of the kind which cities under section 181 of the Kentucky Constitution are not empowered to levy.
This brings us to the second question presented in the form of whether the ordinance imposes invalid “double taxation”. It appears necessary and proper to attempt some clarification of the problem involved. There is no constitutional prohibition against “double taxation” and we have recognized this many times. (See cases next hereinafter cited.) As a matter of history, section 181 of the Kentucky Constitution as originally proposed to the 1890 Constitutional Convention contained a specific prohibition against double taxation. Debates, Constitutional Convention 1890, Vol. 2, page 2373. After a lengthy discussion of what might be permissible double taxation, that prohibition was voted on and stricken. Debates, Constitutional Convention 1890, Vol. 2, page 2794.
Early in our case law the observation was made that it was “not the policy of the state to tax the same property twice as against the same owner”. Cumberland Telephone & Telegraph Co. v. Hopkins, 121 Ky. 850, 90 S.W. 594, 596 (1906). Some of our later opinions apparently overlooked the fact that this observation was made in the context of section 171 of the Constitution, which requires uniformity of taxation. In Harco Corporation v. Martin, 271 Ky. 572, 112 S.W.2d 693, page 700 S.W. (1938), it was stated:
“There exists a judicially declared public policy to frown upon it (double taxation) and to refrain from upholding it, * ⅝ ⅜ ft
Perhaps this court was somewhat presumptuous in attempting to develop a judicial public policy with respect to the validity of tax measures, particularly when that policy was in direct contravention of the policy adopted by the framers of our Constitution. However that may be, it is not the description of a tax measure as “double taxation” which invalidates it. The term simply raises a red flag which warns that the tax may be invalid on a more fundamental ground. As observed by Judge O’Rear in the Cumberland Telephone case, section 171 of the Kentucky Constitution is the barrier to surmount.
That section provides that taxes “shall be uniform”. In Campbell County v. City of Newport, 174 Ky. 712, 193 S.W. 1 (1917), Judge Carroll analyzed the impact of this provision upon the claim of the alleged vice of double taxation. The opinion states (page 5 S.W.):
“In the present Constitution there is a declaration that taxation must be uniform, but no direct prohibition against double taxation. But a prohibition against double taxation was hardly necessary, because there cannot be such a thing as double taxation where the taxation is uniform.
“ ‘Double taxation’ means taxing twice, for the same purpose, in the same year, *257some of the property in the territory in which the tax is laid without taxing all of it. If all the property in the territory upon which the tax is imposed is taxed twice and for the same purpose and in the same year without discrimination or exemption, this is not double taxation in the sense that such taxation is prohibited, because, within constitutional limits, if the tax is uniform, the amount of it is in the discretion of the taxing authorities, and it may all he levied at one time, or it may be the subject of several levies. Uniformity in taxation and double taxation are wholly inconsistent. One cannot exist where the other is in force. And so if our constitutional scheme of uniform taxation is observed, there can be no double taxation.”
This is a clear exposition of the principle set forth in Cumberland Telephone & Telegraph Co. v. Hopkins, 121 Ky. 850, 90 S.W. 594 (1906); Hager v. Walker, 128 Ky. 1, 107 S.W. 254 (1908); Commonwealth v. Walsh’s Trustee, 133 Ky. 103, 106 S.W. 240, 117 S.W. 398 (1909).
It is thus apparent that in questions of this kind our real problem is whether the tax measure violates section 171 of the Constitution. It may be noted that the uniformity requirement is closely related to the prohibition against the exercise of arbitrary power found in section 2 of that instrument. The former section is applicable to license taxes as well as property taxes. City of Louisville v. Aetna Fire Ins. Co., 284 Ky. 154, 143 S.W.2d 1074 (1940), and cases cited therein.
It has long been recognized that a legislative body may discriminate between classes in the imposition of license taxes. Commonwealth v. Payne Medicine Co., 138 Ky. 164, 127 S.W. 760 (1910); Metropolitan Life Ins. Co. v. City of Paris, 138 Ky. 801, 129 S.W. 112 (1910); City of Harrodsburg v. Devine, Ky., 418 S.W.2d 426 (1967). As said in McQuillin, Municipal Corporations, Third Edition, page 146, section 26.-60:
“Classification for the purpose of municipal licensing is a legislative function, and selection by a municipality among avocations, occupations and activities for raising revenue by license is allowed,* providing the selection involves no unreasonable classification.”
In Williams v. City of Bowling Green, 254 Ky. 11, 70 S.W.2d 967 (1934), it is noted that differences in organization, management, and type of business may be sufficiently substantial to justify classification. However, discrimination which does not have a reasonable basis is obviously arbitrary and violates the principle of equality and uniformity set forth in section 171.
Examples of unreasonable classification are shown by the following cases. In Fiscal Court of Owen County v. F. and A. Cox Co., 132 Ky. 738, 117 S.W. 296 (1888), a license tax on vehicles using the streets was held invalid insofar as the tax on four-horse wagons was three times as much as upon three-horse wagons. In City of Covington v. Dalheim, 126 Ky. 26, 102 S.W. 829 (1907), a license tax only on grocers using delivery wagons which was not imposed upon other grocers was held lacking in uniformity. In City of Newport v. Frankel, 192 Ky. 408, 233 S.W. 884 (1921), a license tax on theatres was held invalid where the seller of a twenty-cent ticket was required to pay $15 a day more than the seller of a fifteen-cent ticket. In Commonwealth v. Payne Medicine Co., 138 Ky. 164, 127 S.W. 760 (1910), a license tax upon sellers of patent medicines exclusively, when no such fee was charged other sellers, was held invalid.
Running through the foregoing cases is the principle that a legislative body may not, without some rational basis, select a certain type of business enterprise and impose upon it a substantially heavier tax than that imposed upon other businesses which fall within the same general classification. The case of Great Atlantic & Pacific Tea Co. v. Kentucky Tax Com’n, *258278 Ky. 367, 128 S.W.2d 581 (1939), is quite significant. It involved a graduated tax upon chain stores and the difference in rates was based solely on the number of stores. The opinion, declaring the Act invalid, first notes that a valid classification requires natural and reasonable differences and must be substantial. The court said (page 588 S.W.):
“In the case before us the tax imposed is not a tax upon the privilege of operating any particular kind of store, but is a tax upon the privilege of operating more than one store under one management. The taxes bear no relation to the volume of business, nor do the advantages, alleged to attach to multiple store operation, such as abundant capital, quantity buying, buying for cash and skill in buying, bear any' relation to the number of units operated in any particular group.
“In final analysis the advantages claimed depend upon volume of business and skill in management, and these elements are not peculiar to the ownership of multiple units.”
Another case of significance is Commissioners of Sinking Fund v. Weis, 269 Ky. 554, 108 S.W.2d 515 (1937). Therein the city of Louisville imposed a license tax upon those selling a certain type of merchandise on the installment plan. It was held invalid. The court observed (page 516 S.W.):
“This license tax must be regarded as a revenue measure. It seems to us that the singling out of the business of selling necessities for special licensing savors of inequity rather than of reason. But the controlling factor in the judicial determination of validity is that of logical considerations of uniformity and equality.”
It may be argued that the foregoing cases involve unreasonable discrimination within a particular class, whereas here we do not have discrimination within the class of hotels and motels. However, under the circumstances presented, the same principle is applicable. The City of Lexington by its general licensing ordinance has placed all business enterprises in the city in one class and has not attempted to fix specific fees for specific businesses. These license taxes are based upon the volume of business done as reflected in the net income. Accepting the city’s own argument that the “room tax” is simply an additional tax upon hotels and motels, the situation is the same as if the city had provided that all businesses pay 1½% of the net profits, except hotels and motels shall pay 2 t/i% thereof. Here we have the singling out of a particular business to carry a proportionately heavier tax load than all other businesses. We can find no reasonable basis for imposing this additional tax upon this particular business.
An attempted justification for such discrimination appears in the Preamble to the ordinance, which recites that hotels and motels (and those similarly situated) “use city services of sewage disposal, garbage collection, fire protection and police protection to a greater degree than other citizens, businesses, etc.” The Preamble further recites that the city “is in need of funds”, and we can sympathetically understand this reason, although it of course cannot justify an unreasonably discriminatory tax.
No proof has been taken in this case with respect to the extra city services which might be required by hotels and motels and not by other businesses, and appellees say that issue is not before us. However, we believe the question is presented in determining whether the city has unreasonably placed hotels and motels in a special class for the purpose of imposing on them an additional tax burden. We believe we properly may take judicial notice that a motel would not require more city services than, say, an apartment house with the same number of rooms. In any event, if the city is basing this additional tax upon the rendition of city services, *259then it is violating the principles we have above discussed by not imposing upon other businesses additional taxes commensurate with the furnishing of such services. In fine we are not impressed that the city’s justification of this tax constitutes a reasonable and acceptable basis for this special classification.
The city relies heavily upon 508 Chestnut, Inc. v. City of St. Louis, Mo., 389 S.W.2d 823. In that case the City of St. Louis had a license-tax ordinance which dealt separately with various kinds of business carried on in the city. Some license fees were in fixed amounts and others were based on gross receipts. Hotels were required to pay a license fee of 50 cents annually for each sleeping room. The tax in controversy was one levied on hotels and motels at the rate of 2% of daily rental receipts from transient guests. The contention was that the principle of uniformity was violated because hotels not doing a transient business would not have to pay the tax. The issue was discrimination within the class of hotels and motels. The Supreme Court of Missouri held there was a reasonable basis for making the distinction between transient and nontransient hotels. No contention was made by those representing hotels that this particular business enterprise was being taxed differently or greater than other comparable business enterprises.
As we have above pointed out, the City of Lexington had, prior to the tax in question, placed all businesses in one classification. Without reclassifying other businesses, it has now placed hotels and motels in a single special classification. It is urged by the city that we have upheld the special classification of hotels and motels in Second Street Properties v. Fiscal Court of Jefferson County, Ky., 445 S.W.2d 709 (1969) (hereinabove discussed). Therein was involved the constitutionality of a statute (KRS 83.350) which empowered counties and cities to levy a transient “room tax” upon hotels, motels, and the like, for the purpose of financing the activities of tourists and0convention commissions. The issue of unreasonable classification was raised. The principal ground upon which we sustained the classification was that the limited purpose of the tax accorded this particular taxpayer a special benefit from the utilization of the revenue realized. No such distinguishing feature appears here. In making this distinction, we do not mean to intimate that the recognition of particular benefits flowing from the expenditure of revenue necessarily justifies a classification. However, this consideration, along with others, may tip the scales in determining the reasonableness of the classification.
The only justification we can find for the tax in question and for the singling out of this particular class of taxpayers is that the city is in need of funds and hotels and motels comprise a convenient group to assume additional tax burdens. This is not a legally recognizable basis for classification. It is arbitrary in violation of section 2 of the Kentucky Constitution and violates the uniformity principle of section 171.
The judgment is affirmed.
All concur.

. BUS 84.190(2) also authorizes second-class cities to “license, tax and regulate” hotels and public houses.

. This is generally recognized in other jurisdictions. Hancock v. Singer Mfg. Co., 62 N.J.L. 289, 41 A. 846, 851, 42 L.R.A. 852 (1898); Amos v. Gunn, 84 Fla. 285, 94 So. 615, 640 (1922); Alexander Theatre Ticket Office v. United States, 2 Cir., 23 F.2d 44; Heriot v. City of Pensacola, 108 Fla. 480, 146 So. 654 (1933).