Martin v. Nocero Ice Cream Co.

• Decision Date: 23 March 1937
• Citation: Martin v. Nocero Ice Cream Co., 106 S.W.2d 64, 269 Ky. 151 (Ky. Ct. App. 1937)
• Parties: MARTIN, Commissioner of Revenue, et al. v. NOCERO ICE CREAM CO. et al.
• Court: Kentucky Court of Appeals

106 S.W.2d 64

269 Ky. 151

MARTIN, Commissioner of Revenue, et al. v. NOCERO ICE CREAM CO. et al.

Court of Appeals of Kentucky

March 23, 1937

Rehearing Denied June 25, 1937.

Appeal from Circuit Court, Franklin County.

Action for injunction by Aniello Nocero, doing business as Nocero Ice Cream Company, and others, against James W. Martin Commissioner of Revenue, and others.From a judgment for plaintiffs, defendants appeal.

Affirmed.

B.M Vincent, Atty. Gen., and J.W. Jones, Asst. Atty. Gen., for appellants.

Sam H Brown, of Frankfort, and Blakely & Murphey, of Covington, for appellees.

REES Justice.

This case challenges the validity of so much of section 2 of chapter 3 of the Acts passed at the Third Extraordinary Session of the General Assembly which convened March 30 1936, as imposes a tax on the sale of ice cream in Kentucky.The pertinent provisions of the act read:

"Section Two (2).(a) A state tax is hereby imposed on the sale or use of commodities enumerated in this section in the amounts specified as follows: ***

"The tax imposed upon the sale of ice cream shall be collected by the person making the first sale of ice cream in the Commonwealth of Kentucky and such person shall account for same to the Department of Revenue and he shall make a monthly report covering such sales on or before the 10th of each month following the month during which this Act becomes effective and shall accompany said report with a certified or cashier's check for the amount of the tax. ***

"(d) A state tax is hereby imposed on the sale of ice cream of seven cents (7¢) a quart and a like or proportionate rate on more or less than one (1) quart.The first sale of ice cream in the Commonwealth made by a distributor domiciled in Kentucky shall be subject to the tax and each subsequent sale shall be tax free if the said ice cream shall be accompanied by an invoice on which it is clearly indicated that the tax herein imposed has been assumed by the said distributor."The act has been compiled in the 1936 Edition of the Kentucky Statutes as section 4281d-1 et seq.

Aniello Nocero, doing business as Nocero Ice Cream Company, brought this action in the Franklin circuit court to have the act declared void in so far as it attempts to impose a tax on the sale of ice cream, and asked that the Commissioner of Revenue be enjoined from enforcing that part of the act.Later several manufacturers of and dealers in ice cream filed their joint petition to be made parties.The act was attacked on the grounds that the tax was discriminatory and confiscatory.A demurrer to the petition was overruled, and a large amount of testimony was heard.The circuit court adjudged that the tax on the sale of ice cream was both discriminatory and confiscatory in its operation, and that so much of the act as attempted to impose the challenged tax was void.The Commissioner of Revenue and the associate commissioners comprising the Department of Revenue were enjoined from enforcing or attempting to enforce the collection of the tax.

In view of our conclusion that the tax is confiscatory and that on this ground alone the judgment of the circuit court is correct and must be affirmed, it is unnecessary to determine whether or not it is discriminatory.The question presented is primarily one of fact.Is the tax so unreasonable as to amount practically to a prohibition of a legitimate business?

Nocero, one of the appellees, is engaged in the business of manufacturing ice cream and selling it at wholesale and retail in the city of Covington.He has an investment of about $5,000 in equipment for conducting the business in which he has been engaged for six years.He testified, in substance, that the business had been run at a profit until July, 1936, when it began to show a loss.The act imposing a tax on ice cream became effective July 1, 1936.On the first day of July he increased the price of ice cream sold by him a sufficient amount to absorb the tax, but his sales decreased to such an extent that he removed the tax from the selling price and sold it at the former price for about three weeks.His sales at retail steadily increased from $14.63 a day until the daily average for the month exceeded $22.Finding that he was sustaining a loss, notwithstanding the increase in his sales, he again added the tax to the price of ice cream on July 27.On July 26, his sales had amounted to $30.65.On July 27, the day the price was increased, his sales dropped to $15.21, and on the four succeeding days in July his sales were $13.22, $10.41, $8.29, and $8, respectively.The cost of manufacturing the ice cream was about 85 cents a gallon, and he ordinarily sold it for 97 cents a gallon wholesale and $1.35 retail.If he paid the tax and sold his ice cream at these prices he sustained a substantial loss, and if he added 28 cents a gallon, the amount of the tax, to the former price, his sales decreased to such an extent that his business could not be conducted at a profit.

A great number of persons from different sections of the state, who were engaged in the ice cream business as manufacturers, wholesalers, or retailers, were introduced as witnesses by the appellees, and their testimony, without exception, was to the effect that the tax, which amounted to more than 30 per cent. of the wholesale price, had made the business unprofitable.Herman Feldman, who operates the Newport Dairy, testified that his sales of ice cream averaged more than $80 a day before the act in question became effective, and that after it became effective, and a part of the tax was added to the price, sales decreased about 40 per cent.If he absorbed the tax he sustained a loss, and if he added the tax to the price of the ice cream his sales were insufficient to meet the overhead expenses.Earl Lackes, owner of the Monarch Ice Cream Company, testified that in June, 1936, his sales of ice cream amounted to $2,813.05, and in July, after the tax was added to the price, his sales amounted to $2,219.74.He experimented by selling ice cream without adding the tax to the price and also by adding the tax, and his business showed a loss under both methods of selling.He stated that he had $35,000 invested in the business, and that the tax prevented him from operating at a profit.Herman Hanaken, a wholesale distributor, sold $47.75 worth of ice cream on July 1, 1936, when the tax was added to the price.His sales decreased until July 10, when he restored the former price, and his sales increased to $105.70 a day.He still sustained a loss on his sales, and on July 27, he again added the tax to the price and his sales on that day dropped to $64.35.In a few days they had dropped to $27.05.Paul B. Coss, who operates ten retail stores in Kentucky, testified that his sales of ice cream in July, 1936, were nearly 40 per cent. less than in June, and 20 per cent. less than in May.He also operates stores in Tennessee and Indiana, and his sales of ice cream in those states increased during 1936, while his stores in Kentucky, due to the tax, have shown a loss.R.B. Finley, who is engaged in the sale of ice cream novelties, sold 56,000 dozen ice cream sticks during the first fourteen days of June, 1936, and during the first fourteen days of July, after the tax became effective, he sold only 27,886 dozen.During the first fourteen days of August, he sold 16,776 dozen.Other witnesses testified to substantially the same effect.

The proof shows that the ice cream business is at its peak during the months of July and August.During the first six months of 1936, the business in Kentucky had shown a considerable increase over the like period of 1935, and sales were rapidly increasing.Beginning on the first day of July, the sales materially decreased, and during July and August the sales were less than the sales either in May or June, and were considerably less than the sales made in July and August, 1935.In the states adjoining Kentucky sales of ice cream continued to increase after July 1, and the business for the months of July and August showed a large increase over the same months of 1935.The evidence introduced by appellees shows conclusively that individuals and corporations engaged in the business of manufacturing and selling ice cream, heretofore prosperous, have been operating at a loss since the tax on ice cream became effective on July 1, 1936, and that the business cannot be conducted at a profit so long as the tax is in effect.Not a single witness was introduced by the appellants to contradict this evidence.The testimony of appellees' witnesses was substantiated in every respect by their records which were produced at the trial.The records of numerous individuals and corporations engaged in the ice cream business disclosed that the tax of 28 cents a gallon, imposed by the challenged act, has rendered unprofitable a business theretofore profitable, and that persons engaged solely in manufacturing or selling ice cream and its allied products will be forced to discontinue the business.It is conceded that the tax imposed by section 2 (d) of the act is an excise tax.State Tax Commission v. Hughes Drug Co.,219 Ky. 432, 293 S.W. 944;Shanks, Auditor, v. Kentucky Independent Oil Co.,225 Ky. 303, 8 S.W.2d 383;Metropolis Ferry Co. v. Com.,225 Ky. 45, 7 S.W.2d 506.

Section 181 of our Constitution reads in part: "The general assembly may, by general laws only, provide for the payment of license fees on franchises, stock used for breeding purposes, the various trades, occupations and professions, or a special or excise tax."

In construing this section of the Constitution, this court has uniformly held that the tax must not be prohibitive or confiscatory in amount.In Fiscal Court of Owen County v F. & A. Cox...