Department of Revenue v. Spalding Laundry & Dry Cleaning Co.

• Decision Date: 25 October 1968
• Citation: 436 S.W.2d 522
• Parties: DEPARTMENT OF REVENUE, Commonwealth of Kentucky, Appellant, v. SPALDING LAUNDRY AND DRY CLEANING COMPANY, Appellee.
• Court: United States State Supreme Court — District of Kentucky

Page 522

436 S.W.2d 522

DEPARTMENT OF REVENUE, Commonwealth of Kentucky, Appellant, v. SPALDING LAUNDRY AND DRY CLEANING COMPANY, Appellee.

Court of Appeals of Kentucky.

Oct. 25, 1968.

Rehearing Denied Feb. 21, 1969.

William S. Riley, Asst. Atty. Gen., Frankfort, Paul Shapiro, Frankfort, for appellant.

Carl L. Wedekind, Jr., Stites, Peabody & Helm, Louisville, for appellee.

CLAY, Commissioner.

This is an appeal from a judgment setting aside an order of the Kentucky Board of Tax Appeals which confirmed a sales tax assessment against appellee. The trial court found that KRS 139.170, which defines exempted 'machinery', in failing to encompass appellee's property was arbitrary and unreasonable, and consequently violative of sections 3 and 171 of the Kentucky Constitution and the Fourteenth Amendment to the United States Constitution. The statute in question was declared void.

Appellee is engaged in the laundry and dry cleaning business. When expanding its plant in 1965 it purchased some new machinery. It claimed this machinery exempt from the sales tax under KRS 139.480(8), which exempts 'Machinery for new and expanded industry'. However, KRS 139.170 defines such machinery as:

'* * * that machinery used directly in the manufacturing process, which is incorporated for the first time into plant facilities established in this state, and which does not replace machinery in such plants.'

Appellee concedes that it is not in a manufacturing injustry and therefore its new machinery is not exempt under the definition last above quoted. See Muir v. Samuels, 110 Ky. 605, 62 S.W. 481. Its contention, upheld by the circuit court, is that the statute, in restricting exempt machinery to that used in manufacturing, is arbitrarily and unreasonably discriminatory. ¹

There is no controversy about the applicable legal principles. In the filed of taxation (as in other areas) the legislature may make classifications, and the constitutional limitations prohibit only such classifications as are arbitrary and unreasonable in having no fair and substantial relation to the permissible governmental purpose of the legislation. See Burge v. Marcum, Ky., 394 S.W.2d 908; Louisville Gas & Electric Co. v. Coleman, 277 U.S. 32, 48 S.Ct. 423, 72 L.Ed. 770. Our question is whether the exemption of machinery used in manufacturing is arbitrary and unreasonable because it does not equally exempt similar machinery used in a service industry or plant.

It is common knowledge that in recent years states have strenuously competed for new and expanded industrial development to improve the overall economy of the sovereignty. The promotion of such development, by providing tax benefits, is now a fixed policy of this Commonwealth. In 1955 the people of this state, by amendment to section 170 of the Kentucky Constitution, empowered the General Assembly to authorize cities or towns to exempt 'manufacturing establishments' from municipal taxation (for a period not exceeding five years) 'as an inducement to their location'. By KRS 91.260 and 92.300 the legislature has authorized cities to exempt 'manufacturing establishments' from city taxation. KRS 132.200(4) exempts from county, city, school, or other taxing district taxes, machinery 'of individuals or corporations actually engaged in manufacturing, * * *'.

It is evident therefore that in the minds of the people and the legislature a legitimate public purpose is served by encouraging the location and expansion of manufacturing industries in this state. That such tax exemption statutes are valid is not questioned. See 51 Am.Jur., Taxation, section 591 (page 576); Todd County v. Bond Bros., 300 Ky. 224, 188 S.W.2d 325. As pointed out in that case, the objective was to increase the resources of the state and its taxable property 'through the establishment of new industries'.

It is the contention of appellee that since the purpose of such statutes is the promotion of the general welfare by improving the economy of the state, it is arbitrary and...