United States: Kentucky Court Of Appeals Holds Telecommunications Tax Is Unconstitutional

The Kentucky Court of Appeals has held that the state's telecommunications tax is unconstitutional because it prohibits local governments from collecting telecommunications franchise fees.1 The Kentucky Constitution authorizes local governments to impose franchise fees on utilities, but the state has been collecting the telecommunications tax in lieu of the local level franchise fee system since January 1, 2006. Significant changes are expected based on this ruling if it is affirmed on appeal, including the possibility that historic local level franchise fees will be re-enacted as part of a final resolution.

Background

In 2005, Kentucky enacted the telecommunications tax to be effective for services billed on or after January 1, 2006.2 Previously, local governments collected franchise fees from telecommunications companies and cable providers pursuant to Sections 163 and 164 of the Kentucky Constitution.3 The telecommunications tax expressly prohibits local governments from imposing such franchise fees on this type of service.4 The statute imposes the following:

  • 3 percent excise tax on retail purchases of multichannel video programming (MVP) services;5
  • 2.4 percent tax on gross revenues of providers of MVP services;6 and
  • 1.3 percent tax on gross revenues of providers of communication services.7

In this litigation, several Kentucky cities banded together to challenge the telecommunications tax and seek to restore their right to collect franchise fees.8 The circuit court entered a judgment on the pleadings and held that the telecommunications tax did not violate Sections 163 and 164 of the Kentucky Constitution. The cities appealed this decision.

Tax Violates Kentucky Constitution

In an unpublished opinion, the Kentucky Court of Appeals held that the telecommunications tax violates Sections 163 and 164 of the Kentucky Constitution. Section 163 of the Kentucky Constitution provides that no utility franchise may be granted without the consent of the appropriate local government. Kentucky courts have consistently interpreted this provision as a delegation to local governments of the right to grant utility franchises within their boundaries.9 Section 164 of the Kentucky Constitution provides that no local government may grant a franchise for a term exceeding 20 years.10 By enacting this provision, the drafters of the Kentucky Constitution envisioned that local governments would receive valuable consideration in exchange for granting utility franchises.

The Court explained that Kentucky cases have recognized the state's authority to enact a statute to regulate a utility franchise granted by a local government,11 but the telecommunications tax is unique because it "seeks to impose state taxes at the expense of franchise fees historically imposed and collected" by local governments. There was no dispute that the telecommunications tax expressly prohibits local governments from collecting franchise fees. The state has retained considerable power to regulate local utility franchises, but Section 163 of the Kentucky Constitution gives local governments the right to collect franchise fees. The Court held that the state cannot enact legislation to eliminate the local governments' constitutionally delegated authority to grant a franchise and collect franchise fees. According to the Court, this change only may be accomplished through a constitutional amendment. Thus, the cities were entitled to summary judgment because the telecommunications tax is unconstitutional.

Commentary

The state or telecommunications companies are expected to appeal this case to the Kentucky Supreme Court.12 Because no injunction has been issued, the telecommunications tax still exists and is imposed as it has been since January 1, 2006. This raises more questions for companies collecting or paying the telecommunications tax than it solves. For example, companies need to consider whether they should continue to collect and pay the state telecommunications tax. If refund claims are filed, companies must decide which tax periods and components of the state telecommunications tax to include in the refund claims. Also, companies need to consider whether any amounts refunded to the company will need to be refunded to their customers. There is a possibility that the state and local governments will reach an agreement that will validate the prior taxes and preclude any refund claims. Finally, there is a possibility that a new tax regime will be enacted where both the state telecommunications tax and new local-level franchise fees will be imposed on service providers.

At present, it is assumed that the state or telecommunications companies will appeal this ruling. The Court of Appeals has not addressed or even suggested when and how changes will be made. It is unknown if the ruling will be applied retroactively or prospectively and if any prior period franchise fees could be assessed on qualifying service providers. Given the broad reach of the decision and the possibility that a resolution of the taxability of MVP and communications services is unlikely for some period of time, companies impacted by this case and this tax should consider whether to file protective refund claims for the full open statute of limitations for each company (noting that any lookback periods may be limited under the current ruling that the tax is unconstitutional). In addition, companies should determine whether to file any future returns under protest in order to protect any future refund rights.

Footnotes

1 City of Florence v. Flanery, Kentucky Court of Appeals, No. 2013-CA-001112-MR, Nov. 7, 2014 (unpublished opinion).

2 KY. REV. STAT. ANN. §§ 136.600–136.660. This tax is named the Multichannel Video Programming and Communications Services Tax.

3 According to the Kentucky League of Cities, one of the entities that initiated this litigation, the amount of the fees typically was negotiated in the franchise agreements.

4 KY. REV. STAT. ANN. § 136.660(1)(a).

5 KY. REV. STAT. ANN. § 136.604(2).

6 KY. REV. STAT. ANN. § 136.616(2)(a). Accordingly, the tax rate on sales of MVP services is 5.4 percent.

7 KY. REV. STAT. ANN. § 136.616(2)(b). Accordingly, the tax rate on sales of telecommunications services is 4.3 percent.

8 The Kentucky League of Cities has estimated that the state telecommunications tax has resulted in a $7.5 million annual shortfall to local governments.

9 City of Florence v. Owen Electric Cooperative, Inc., 832 S.W.2d 876 (Ky. 1992); Kentucky Utilities Co. v. Board of Commissioners, 71 S.W.2d 1024 (Ky. Ct. App. 1933).

10 This also provides that local governments must use a competitive bidding process before granting a franchise.

11 Southern Bell Tel. & Tel. Co. v. City of Louisville, 96 S.W.2d 695 (Ky. Ct. App. 1936); Kentucky Utilities Co., 71 S.W.2d 1024.

12 The Court of Appeals currently is considering petitions for rehearing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions