City of Lexington v. Motel Developers, Inc.

• Citation: 465 S.W.2d 253
• Parties: CITY OF LEXINGTON et al., Appellants, v. MOTEL DEVELOPERS, INC., et al., Appellees.
• Decision Date: 02 April 1971
• Court: United States State Supreme Court — District of Kentucky

Page 253

465 S.W.2d 253

CITY OF LEXINGTON et al., Appellants, v. MOTEL DEVELOPERS, INC., et al., Appellees.

Court of Appeals of Kentucky.

April 2, 1971.

Frank S. Ginocchio, Earl S. Wilson, Lexington, for appellants.

Miller, Griffin & Marks, Lexington, for appellees.

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 1 1/2% 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 section 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 the 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 question 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 roblem 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 orginally 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, * * *.'

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...