Gillis v. Yount
| Decision Date | 03 March 1988 |
| Docket Number | 87-SC-288-DG,Nos. 87-SC-286-D,s. 87-SC-286-D |
| Citation | 748 S.W.2d 357 |
| Parties | Gary GILLIS, Secretary of the Revenue Cabinet, Movant, v. William D. YOUNT, Scott Barbour and others similarly situated, Alison Moore, J.D. Miller, Elaine Stoltzfus and others similarly situated and the Kentucky Coal Association, Respondents . The KENTUCKY COAL ASSOCIATION, INC., Movant, v. Alison MOORE, J.D. Miller, Elaine Stoltzfus and all others similarly situated, William D. Yount and Scott Barbour and all others similarly situated, Respondents. |
| Court | United States State Supreme Court — District of Kentucky |
Ross T. Carter, Douglas M. Dowell, Frankfort, for Gary Gillis.
Frederick W. Whiteside, Lexington, for amicus curiae, League of Women Voters.
Bruce F. Clark, Gayle W. Herndon, Stites & Harbison, Frankfort, for Kentucky Chamber of Commerce.
Ira A. Burnim, Washington, D.C., Phillip Shepherd, Joe Childers, Lexington, J. Richard Cohen, Morris S. Dees, Montgomery, Ala., for Moore Appellees.
James R. Cox, Hirn Reed & Harper, Louisville, for Kentucky Coal Assn.
Wayne J. Carroll, Ewen, MacKenzie & Peden, P.S.C., Louisville, for amicus curiae, Kentucky Farm Bureau Federation.
Joseph J. Leary, Frankfort, for Yount and Barbour.
These cases challenge the constitutionality of KRS 132.020(5), which classifies unmined coal separately from other real property and then taxes it "at the rate of one-tenth of one cent ($.001) per one hundred dollars ($100) of assessed value." All other real property is taxed "for state purposes" under KRS 132.020(1) at "thirty-one and one-half cents (31 1/2cents) upon each one hundred dollars ($100) of value."
The cases are consolidated. In the first case Yount and others similarly situated, a class of real property owners, claim that the statute is unconstitutional because the General Assembly has arbitrarily classified one type of real property separately from other real property. In the second case Moore and others similarly situated, a class of automobile owners, claim that the 1 mil ("$.001") rate is unconstitutional because it is an exemption and not a tax.
The Franklin Circuit Court, after trial on the merits, entered judgment (1) rejecting the claim that the separate classification for unmined coal was constitutionally impermissible, and (2) upholding the claim that the tax rate "bestows on unmined coal a de facto exemption from property taxation," and thus "is unconstitutional under Sections 3 and 174 of the Constitution."
On appeal the Court of Appeals ruled in favor of the claims of both plaintiffs, agreeing with the trial court that this one mil rate for unmined coal was in fact an unconstitutional exemption, and then further holding that the separate classification of unmined coal was arbitrary and therefore unconstitutional under Section 171 of our Constitution which requires that "[t]axes ... shall be uniform upon all property of the same class subject to taxation within the territorial limits of the authority levying the tax." 1
A majority of our Court has decided that the classification issue is the threshold issue on discretionary review. Having decided that KRS 132.020(5) is an arbitrary classification in violation of Section 171 of the Kentucky Constitution, as quoted above, the Court has elected not to consider whether the $.001 ad valorem levy upon unmined coal is an unconstitutional tax rate.
Both sides agree that Kentucky law classifies ownership of unmined coal as an interest in real estate. As stated in Williams' Adm'r v. Union Bank and Trust Co., 283 Ky. 644, 143 S.W.2d 297, 300 (1940): "[i]t has long been the law of this State that minerals in place are real estate...." And as stated in Commonwealth v. Elkhorn-Piney Coal Min. Co., 241 Ky. 245, 43 S.W.2d 684, 686 (1931):
"[T]he rights created by a coal lease ... constitute real estate for the purposes of taxation under our present statutes."
From 1792, when Kentucky's first property tax was levied, until the 1970's, coal was taxed only insofar as it was included in the value of the surface property. Then in the 1970's, the General Assembly enacted a new type of tax, the severance tax, first applicable only to coal and then extended to "the physical removal of [any] natural resource from the earth or waters of this State by any means" with certain exemptions and exceptions which are not relevant to this case. KRS Chapters 143 and 143A.
The new tax is an excise tax "upon the privilege of severing and processing coal" and not a property tax. Circle "C" Coal Co., Inc. v. Com., Ky.App., 628 S.W.2d 883, 885 (1982). Coal was the first mineral, and is perhaps the major one, subject to this new excise tax, the severance tax, but it is certainly not the only one. "Rock, stone, limestone, shale, gravel, sand, clay, natural gas, and natural gas liquids," are all classified as a "natural resource" (KRS 143A.010) and taxed at the same rate (KRS 143A.020), which is 4 1/2%. Under KRS 137.120 a similar tax is imposed upon "all crude petroleum produced in this state."
However, for purposes of ad valorem taxation unmined coal alone has been separately classified from other real estate. In 1976, the General Assembly classified coal separately from other real estate for the first time (1976 Kentucky Acts, Chapter 84, Section 7), and in 1978 the General Assembly followed this up with the new rate of one cent per thousand (one mil) enacted in KRS 132.020(5). The connection between classifying unmined coal separately from other interests in real property subject to ad valorem tax and then imposing the new one mil rate for such property is abundantly clear from review of the legislative history of the one mil rate.
The framers of the 1891 Kentucky Constitution, to protect the people, enacted significant constitutional limitations upon the powers of the General Assembly to impose state property taxes and create exemptions. 2 Debates Constitutional Convention 1890, 2372-2423 (1890). The primary source of tax revenue at the time was property taxes, and this is where the problems with unfairness were perceived, so these constitutional limitations, covered principally in Kentucky Constitutions Sections 170-175, deal only with the power to tax property, or ad valorem taxes. They require inter alia, that taxes "shall be uniform upon all property of the same class," (Section 171), that "all property, not exempted from taxation by this Constitution, shall be assessed ... at its fair cash value" (Section 172), and that "all property ... shall be taxed in proportion to its value, unless exempted by this Constitution; and ... shall pay the same rate of taxation" (Section 174). The constitutional exemptions are specified in Section 170, which states that "all laws exempting or omitting property from taxation other than the property above mentioned shall be void." It is almost impossible to see how the constitutional mandate on state property taxes could have been expressed in clearer or more positive terms.
The one mil rate (one cent per thousand) was devised as a method to avoid these constitutional restrictions. See Joint Submission, Kentucky Department of Revenue, Annual Report HS-88 (1975-76). The movant, Gary Gillis, Secretary of the Revenue Cabinet, candidly conceded that the legislative purpose behind a one mil rate is to create a de facto exemption, although arguing that this is constitutionally permissible. The only way to effect such a purpose, a de facto exemption, with reference to unmined coal was to first classify it separately from other real property, and to then designate one mil as the applicable rate. The statutes of 1976 and 1978 were enacted as a plan to effect this purpose.
The need to enact a one mil rate when the General Assembly wished to favor a certain type of property with a de facto tax exemption resulted from the decision of our Court in Russman v. Luckett, Ky., 391 S.W.2d 694 (1965). Russman is the bellwether case on the subject of constitutional limitations on property taxes. It was a taxpayers' suit attacking the assessment procedures then in place by which "real estate and tangible personal property in Kentucky [were] assessed for tax purposes at varying percentages substantially less than 100 percent of fair cash value." 391 S.W.2d at 695. Our Constitution, Section 172, specifies that "[a]ll property, not exempted from taxation by this Constitution, shall be assessed for taxation at its fair cash value." Nevertheless, over a period of 75 years the practice had evolved of "substituting the test of 'uniformity' in place of 'fair cash value'." In Russman, our Court delivered to the executive branch and the legislature the message that in the area of property taxes, when called upon to do so, our Court was prepared to enforce the Constitutional mandate. We stated that there is Id. at 697.
As admitted by the Revenue Cabinet, primarily in reaction to Russman the concept of a one mil tax rate developed to avoid the tax burden for certain types of property which did not enjoy constitutional exemption but which were perceived by the General Assembly as needing de facto exemption in the public interest. Because unmined coal was taxed as an interest in real estate, in order to favor unmined coal with this de facto exemption it was necessary to employ a two-stage procedure, first classifying it separately from other real estate, and then assigning to it the 1 mil rate. The question is, of course, whether this procedure is legitimate tax avoidance or unconstitutional tax evasion; does the method instituted to avoid the constitutional limitations in Section 172 impale upon the constitutional limitations in Sections 171 and 174? In answering that question there are several arguments in the present case that track similar arguments in Russman, and that...
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