United States: Kentucky Court Finds Retroactive Application Of Statute Constitutional

In Wal-Mart Stores East, LP v. Department of Revenue, Civ. Action No. 14-CI-870 (Franklin Cir. Court June 9, 2015), the Franklin Circuit Court considered the constitutionality of retroactive application of a 2009 amendment to KRS § 139.570.  During the period for which the taxpayers claimed refunds (2003 to 2008), KRS § 139.570 provided that a seller may deduct on each sales tax return 1% of the tax due in excess of $1,000 as reimbursement for the cost of collecting and remitting the tax.  Three budget bills enacted during the refund period placed a $1,500 cap on the total reimbursement allowed per taxpayer in any month.  Effective July 1, 2008, the Kentucky General Assembly passed a separate bill (that is, separate from the budget bills) formally amending KRS § 139.570 to reflect the $1,500 cap.  In 2009, the General Assembly repealed and reenacted KRS § 139.570 to include the $1,500 reimbursement limit and apply the limit retroactively to July 1, 2003. 

On average, Petitioners Wal-Mart Stores East, LP ("Wal-Mart") and Sam's East, Inc. ("Sam's") collect and remit a combined $17 million in sales tax each month to the Kentucky Department of Revenue (the "KDOR"). For the periods of July 1, 2003 – June 30, 2004 and July 1, 2005 – June 30, 2008, Wal-Mart and Sam's remitted the sales tax collected and withheld $1,500 as vendor compensation.  On September 8, 2008, Wal-Mart and Sam's submitted refund claims to the KDOR for vendor compensation owed to them over the $1,500 limit.  They argued their refund claims were filed after the $1,500 cap provisions in the budget bills expired and within the four year statute of limitations set forth in KRS § 134.580. 

The Petitioners also advanced several constitutional arguments in support of their refund claims:  (1) the budget bills violated the provision of Section 51 of the Kentucky Constitution requiring that an act relate to only one subject and that the subject be expressed in the title of the act; (2) the General Assembly cannot amend tax laws in budget bills; (3) the 2009 legislation repealing and reenacting KRS § 139.570 to include the $1,500 cap violated Section 180 of the Constitution, as it diverted private money to the General Fund; and (4) the general four year statute of limitations in KRS § 134.580 applied instead of the two year statute of limitations set forth in KRS § 134.590(2).  The Petitioners argued KRS § 139.590 did not apply because they were not challenging the constitutionality of KRS § 139.570, but only the attempted amendments to the statute by the budget bills.

After the KDOR denied their refund claims, the Petitioners appealed to the Kentucky Board of Tax Appeals (the "KBTA"), which affirmed the KDOR's final rulings and held it did not have jurisdiction to reach the Petitioners' constitutional challenges.  The Petitioners appealed to the Franklin Circuit Court.

On appeal, the court considered four main issues.  First, the court held the General Assembly's retroactive repeal and reenactment of KRS § 139.570 in 2009 was constitutional.  Citing Miller v. Johnson Controls, 296 S.W.3d 392 (Ky. 2009), cert. den., ___ U.S. ___ (May 24, 2010), the court found the retroactive application of KRS § 139.570 was supported by a legitimate legislative purpose, and the means chosen to advance that purpose were appropriately tailored to the legislature's legitimate objective.  The legitimate objective of the legislation, the court held, was to eliminate the windfall to large retailers that results when their collection costs are calculated as a percentage of the total tax remitted, thus maximizing the tax collected for the general obligations of government.  Moreover, the court found that because the legislature took interim actions to reduce compensation to retailers through the budget bills, the retailers were on notice they could not rely upon the compensation formula, which was suspended in the budgets.  Although the court found its holding on retroactivity compelled a decision in favor of the KDOR, it proceeded to briefly address the other issues in the case.

The court next held the repeal and reenactment of KRS § 139.570 did not violate Section 180 of the Constitution, which provides that every act enacted by the General Assembly levying a tax must specify the purpose for which the tax is levied, and no tax levied and collected for one purpose shall ever be devoted to another purpose.  The Petitioners argued that by taking money that was supposed to be collected for reimbursing vendors and redirecting this money to the General Fund, the money was collected for one purpose and devoted to another.  The court disagreed.  The court noted that taxes collected by retailers are held in trust for the Commonwealth, and the retailers have no property interest or private right to any of the funds collected from consumers.  Thus, the court found the money was collected for the general fund all along and not impermissibly transferred.

The court then held that the cap provision in the budget bills did not violate Section 51 of the Kentucky Constitution because the titles clearly related to appropriations and revenue measures.  The court reiterated that no private funds were at issue, as the retailers have no property interest in the sales tax collected.  The court also noted that Section 51 does not apply to bills that modify or suspend a statute, and the budget bills only modified or suspended (not amended) KRS § 139.570.

Finally, the court found it did not need to determine whether the retailers' claims were barred by the statute of limitations, as the retailers' refund claims were not meritorious.

The Petitioners have appealed the Franklin Circuit Court's Opinion and Order to the Kentucky Court of Appeals.

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