Commonwealth v. Interstate Gas Supply, Inc.

• Decision Date: 22 March 2018
• Docket Number: 2016-SC-000281-DG
• Citation: 554 S.W.3d 831
• Parties: COMMONWEALTH of Kentucky, Finance and Administration Cabinet, Department of Revenue, Appellant v. INTERSTATE GAS SUPPLY, INC., FOR the USE AND BENEFIT OF TRI-STATE HEALTHCARE LAUNDRY, INC., Appellee
• Court: United States State Supreme Court — District of Kentucky

554 S.W.3d 831

COMMONWEALTH of Kentucky, Finance and Administration Cabinet, Department of Revenue, Appellant

v.INTERSTATE GAS SUPPLY, INC., FOR the USE AND BENEFIT OF TRI-STATE HEALTHCARE LAUNDRY, INC., Appellee

2016-SC-000281-DG

Supreme Court of Kentucky.

RENDERED: MARCH 22, 2018

Rehearing Denied September 27, 2018

COUNSEL FOR APPELLANT: Douglas M. Dowell, Kentucky Department of Revenue, Office of Legal Services for Revenue.

COUNSEL FOR APPELLEE: Timothy Joseph Eifler, Stephen A. Sherman, Louisville, Stoll Keenon Ogden PLLC.

OPINION OF THE COURT BY JUSTICE HUGHES

Section 170 of the Kentucky Constitution provides in part that "[t]here shall be exempt from taxation ... institutions of purely public charity." This case requires us once again to consider the scope of this "public charity" exemption, and more specifically to decide whether it relieves a qualifying charitable institution from the use tax imposed by Kentucky Revised Statute (KRS) 139.310. The Finance and Administration Cabinet’s Department of Revenue (the Department), the Board of Tax Appeals, and the Franklin Circuit Court all concluded the § 170 constitutional exemption speaks only to ad valorem (property) taxes, but the Court of Appeals disagreed. We granted the Department’s motion for discretionary review, and for the following reasons hold the Department, the Board of Tax Appeals, and the circuit court correctly concluded that Ky. Const. § 170 does not exempt a "public charity" institution from the use tax imposed by KRS 139.310.

RELEVANT FACTS

According to the parties' stipulation, the taxpayer in this case, Tri-State Healthcare Laundry, Inc., is a joint-cooperative laundry association located in Edgewood, Kenton County, Kentucky. Tri-State was formed by, is owned by, and serves the laundry needs of three charitable hospitals in the Kenton County/Greater Cincinnati metropolitan area. For reasons not included in the stipulation or otherwise explained, Tri-State is not registered with the Internal Revenue Service as an I.R.C. (Internal Revenue Code) § 501(c)(3) corporation and does not qualify for a charitable exemption from the federal income tax.¹ Because Tri-State is not a § 501(c)(3) organization, it does not qualify for the exemption from sales and use taxes provided to local non-profits under KRS 139.495. Nor does it otherwise qualify for any of the specific sales and use tax exemptions provided in KRS 139.470(1) - (23). Since 1998, however, the Department and its predecessors have deemed Tri-State an "institution of purely public charity" under Ky. Const. § 170 and have accordingly exempted it from ad valorem taxation. Relying on this state-recognized "public charity" status, Tri-State now seeks exemption from the Kentucky use tax for its natural gas purchases.²

Tri-State uses natural gas in the operation of its laundry business, and during the period pertinent to this case, it obtained that gas from Appellee Interstate Gas Supply, Inc. (IGS), an Ohio corporation headquartered in Dublin, Ohio, IGS’s business includes the retail sale of natural gas to customers in northern Kentucky, such as Tri-State, and it has duly registered the Kentucky portion of its business with the Department, KRS 139.340 and 139.390. In accord with KRS 139.340, IGS collects use taxes on its natural gas sales to Kentuckians and remits the taxes to the Department.

This case began in October 2009 when IGS (the tax collector and remitter) applied to the Department on behalf of Tri-State (the taxpayer) for a refund of all Kentucky use taxes Tri-State paid through IGS from September 1, 2005 to August 31, 2009, a sum exceeding $99,000, plus the appropriate interest. In support of their refund claim, IGS and Tri-State advanced two theories. First, they maintained that Tri-State’s recognized status as an "institution of purely public charity" exempted it under § 170 from all revenue-raising taxes (use tax included), not just ad valorem taxes. Second, citing Commonwealth ex rel. Luckett v. City of Elizabethtown, 435 S.W.2d 78 (Ky. 1968), they maintained that the use tax, regardless of its name and the fact that use taxes are usually viewed as excise taxes rather than property taxes, operates so like a property tax as to bring it within the § 170 charitable institution exemption even if that constitutional provision applies only to property taxes.

In its August 2010 Final Ruling, the Department denied the IGS/Tri-State refund claim and explained that in its view, even though Tri-State has been deemed a "purely public charity" for the purposes of § 170, both theories advanced by the claimants have been rejected. The Department reasoned that this Court explicitly rejected the first theory and implicitly rejected the second theory in Children’s Psych. Hosp. of N. Kentucky, Inc. v. Revenue Cabinet, 989 S.W.2d 583 (Ky. 1999). In that case, the Court held that the § 170 exemption for institutions of purely public charity was addressed to ad valorem taxes only and so did not apply to the 1994 "Healthcare Provider Tax" on the state’s hospitals. This holding, in the Department’s view, amounted to an explicit rejection of the claimants' theory that Tri-State is exempt from all revenue-raising taxes, and was implicitly a rejection of the ruling in City of Elizabethtown that § 170 exemptions could extend to use taxes. Even if City of Elizabethtown remained viable after Children’s Psych. Hosp., the Department further explained, the City of Elizabethtown case was distinguishable in that it concerned a different § 170 exemption, i.e., not the "public charity" exemption at issue here, but rather the exemption for "public property used for public purposes."³

Undeterred, IGS and Tri-State appealed the Department’s ruling to the Kentucky Board of Tax Appeals. They relied on the same two theories the Department rejected and, for essentially the same reasons, the Board rejected them as well. Likewise, the Franklin Circuit Court, upon review of the Board’s decision, concluded that under Children’s Psych. Hosp. , the § 170 exemption for public charities "only exempts institutions of purely public charity from the payment of property taxes. Since the use tax is not a property tax, the exemption does not apply."

In the Court of Appeals, the claimants' perseverance finally paid off. Although the appellate panel concluded that Children’s Psych. Hosp. had undone an eighty-year-old construction of the constitutional exemption for "public charities"⁴ by confining that exemption to property taxes, it found merit in the claimants' alternative theory. Having discussed City of Elizabethtown, the panel noted that "[t]he current law in Kentucky [as expressed in City of Elizabethtown ] is that the use tax imposed under KRS 139.310 is similar enough to an ad valorem tax to render its enforcement on governmental entities unconstitutional under Section 170." The panel saw no reason "why the rule should be applied differently with respect to institutions of purely public charity." Finding that Tri-State had, in effect, been taxed in violation of § 170, the Court of Appeals reversed the circuit court.

We granted the Department’s motion for discretionary review to consider the viability and scope of City of Elizabethtown. Not surprisingly, IGS and Tri-State have asked, as an alternative ground of affirmance, that we also consider the viability and scope of Children’s Psych. Hosp. The issues having been presented as pure questions of law arising from stipulated facts, our standard of review is de novo. Freeman v. St. Andrew Orthodox Church, Inc., 294 S.W.3d 425 (Ky. 2009). We begin our analysis with consideration of the specific tax at issue, namely the use tax.

ANALYSIS

I. Section 170 of the Kentucky Constitution Provides for Exemptions from Property Taxes Only

A. The Kentucky Use Tax

Use taxes are commonly imposed in conjunction with sales taxes and are intended to counteract any incentive the sales tax might give to local consumers to shop in another jurisdiction where the sales tax is less or non-existent. See Henneford v. Silas Mason Co., 300 U.S. 577, 579-81, 57 S.Ct. 524, 81 L.Ed. 814 (1937) (describing the then sales/use tax regime of Washington State). In very general terms, use taxes achieve that purpose in two steps. The first step is the imposition of a broad tax, at the sales tax rate, on the "use of" or the "privilege of using" within the taxing jurisdiction tangible personal property purchased anywhere. That liability falls on the "user" of the property. The sweeping liability thus created is then just as dramatically narrowed in the second step, by provisions that give use tax credit (or exemption) for sales tax already paid, within the jurisdiction or without, on the subject property. The upshot is a tax supplemental to the retail sales tax on personal property used—for consumption, not for resale—inside the jurisdiction even though purchased outside it. See Nat'l Geographic Soc. v. California Bd. of Equalization, 430 U.S. 551, 555, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977) (addressing aspects of California’s then version of the regime and noting that, generally, "States that impose sales taxes also impose a corollary use tax on tangible property bought out of State to protect sales tax revenues and put local retailers subject to the sales tax on a competitive parity with out-of-state retailers exempt from the sales tax.").⁵

Kentucky’s statutes fit this pattern.⁶ "The sales and use tax laws are integrated elements of a taxing program that is designed to reach all transactions in which tangible property is sold inside or outside of Kentucky for storage, use, or consumption within Kentucky." Revenue Cabinet v. Lazarus, Inc., 49 S.W.3d 172, 175 (Ky. 2001) (citing Genex/London, Inc. v. Ky. Bd. of Tax Appeals , 622 S.W.2d 499, 506 (Ky. 1981) ). The use tax is "a backstop to the sales tax because it ensures that transactions in other states are treated just as if they had taken place in this state and been subjected to...