Popplewell's Alligator Dock v. Revenue Cab.
| Decision Date | 22 April 2004 |
| Docket Number | No. 2001-SC-0439-DG.,No. 2001-SC-0434-DG.,2001-SC-0434-DG.,2001-SC-0439-DG. |
| Parties | POPPLEWELL'S ALLIGATOR DOCK NO. 1, INC., Appellant, v. REVENUE CABINET, Commonwealth of Kentucky, Appellee. and Revenue Cabinet, Commonwealth of Kentucky, Appellant, v. State Dock, Inc.; and Popplewell's Alligator Dock No. 1, Inc., Appellees. |
| Court | United States State Supreme Court — District of Kentucky |
These consolidated appeals present two issues for the Court's consideration. In 2001-SC-434-DG, we answer a question concerning substantive sales and use tax law, and in 2001-SC-439-DG, we reexamine procedural law governing judicial review of a sales and use tax controversy.
Popplewell's Alligator Dock No. 1, Inc. ("Alligator Dock") rented houseboats to the public for recreation and vacation purposes. It collected and remitted sales and use taxes on the houseboat rentals to Kentucky's Revenue Cabinet ("Revenue Cabinet"), but it failed to remit taxes on gasoline it sold for use in the houseboats. After an audit, the Revenue Cabinet assessed taxes against Alligator Dock for the gasoline it sold. Alligator Dock contends that the gasoline sales were exempt from sales and use taxes under KRS 139.483's exemption for "fuel consumed in the operation of ... ships and vessels which are used principally in the transportation of property or in the conveyance of persons for hire." Was the gasoline sold by Alligator Dock for use in its houseboats exempt from Kentucky's sales and use tax? Because we hold that KRS 139.483's exemption does not apply to houseboats used principally for lodging, Alligator Dock owes sales and use taxes on the gasoline. We, therefore, affirm the Court of Appeals's decision upholding the Revenue Cabinet's assessment.
State Dock, Inc ("State Dock") also rented houseboats to the public for vacations. Without pursuing any of the administrative remedies available to it, State Dock filed a civil action in Franklin Circuit Court against the Revenue Cabinet in which it sought (1) a declaratory judgment that its houseboat rentals are not subject to sales and use taxes, and (2) a permanent injunction enjoining the Revenue Cabinet from assessing or attempting to collect such taxes. Alligator Dock intervened in the action and requested the same relief and an additional declaration that the gasoline it sold for consumption in the operation of its houseboats was not subject to sales and use taxes. The trial court dismissed the declaratory judgment actions on jurisdictional grounds because it found that State Dock and Alligator Dock (collectively "the Docks") were required to pursue their administrative remedies before seeking judicial review. The Court of Appeals, however, reversed the trial court and held that, because there was no factual dispute and the Docks only wished to ascertain the validity or applicability of KRS 139.483, the Docks were not required to exhaust their administrative remedies before they could seek declaratory relief. Were the Docks required to exhaust their administrative remedies? Because the Docks failed to demonstrate that pursuit of their administrative remedies was likely to be inadequate or an exercise in futility, they were required to exhaust their administrative remedies before seeking judicial review. Accordingly, we reverse the Court of Appeals on this issue and dismiss the Docks' declaratory judgment actions.
The facts are not disputed.1 Alligator Dock operated a marina on Lake Cumberland in Russell County, Kentucky. As part of its retail business, Alligator Dock rented luxury houseboats to the public for recreation and vacation purposes. Under the terms of Alligator Dock's rental agreements, a person renting a houseboat took possession of it with a full tank of gasoline and was required to return it to the marina at the end of the rental period with a full tank of gasoline. If, upon the houseboat's return, its gasoline tank was not filled, the marina's employees would refill it, and the renter was charged an additional amount for the gasoline used during the rental period. Although Alligator Dock collected and remitted sales and use tax on its houseboat rentals,2 it did not collect and remit sales and use taxes3 on the gasoline sold by it and consumed in the operation of its rented houseboats.
After an audit, the Revenue Cabinet issued "sales and use tax assessments" totaling $12,018.514 against Alligator Dock for gasoline sales to persons renting its houseboats. Following a final ruling by the Revenue Cabinet that upheld its assessments, Alligator Dock appealed the assessments to the Kentucky Board of Tax Appeals ("KBTA") and argued that the gasoline sales were exempt from use taxes under KRS 139.483, which provides:
The taxes imposed under the provisions of [the Sales and Use Taxes] [C]hapter shall not apply to the sale of, or the storage, use, or other consumption of, ships and vessels, including property used in the repair or construction of, supplies and fuel consumed in the operation of, and supplies consumed by crew members aboard such ships and vessels which are used principally in the transportation of property or in the conveyance of persons for hire.
The KBTA concluded that KRS 139.483's exemption did not apply because the houseboats were not "principally engaged or used in the transportation of property or the conveyance of persons for hire ...." Accordingly, the KBTA affirmed the Revenue Cabinet's final ruling and upheld its tax assessments against Alligator Dock. Alligator Dock then appealed to Franklin Circuit Court, which agreed with the KBTA's conclusion that the houseboats were not engaged "for hire" and affirmed the KBTA's decision. Seeking further review, Alligator Dock appealed to the Court of Appeals, which also agreed with this construction of the KRS 139.483 exemption and affirmed the Franklin Circuit Court's decision. This Court granted Alligator Dock's motion for discretionary review, and we, too, affirm the tax assessments.
State Dock filed a declaratory judgment action against the Revenue Cabinet in which it sought a declaration that KRS 139.483 operated to exempt its houseboat rentals from sales and use taxes as well as a permanent injunction enjoining the Revenue Cabinet from assessing or attempting to collect sales taxes on its houseboat rentals. After it was permitted to intervene, Alligator Dock requested the same relief as State Dock, and, by amended complaint, also requested a declaratory judgment that its gasoline sales to persons renting its houseboats were exempt from sales and use taxes. The Revenue Cabinet asserted that the trial court lacked jurisdiction and moved to dismiss the action. The trial court agreed, held that the Docks were required to pursue the administrative remedies provided by statute, and granted the Revenue Cabinet's motion to dismiss. The Docks appealed and the Court of Appeals held that, because the facts were undisputed and the only issue involved the construction and application of KRS 139.483, the Docks were not required to exhaust their administrative remedies; thus, it reversed the case and remanded it to the trial court. We granted discretionary review and now reverse.
As previously noted, Alligator Dock contends that its sale of gasoline consumed in the operation of its rental houseboats is exempt from sales and use taxes under KRS 139.483. Accordingly, this appeal involves the construction and application of KRS 139.483's sales and use tax exemption, and we begin that analysis with the observation that tax exemptions are disfavored and will be narrowly or strictly construed, with all doubts resolved against the exemption's application, and with the burden placed on the party claiming the exemption to show the party's entitlement to it.5 In support of its contention, Alligator Dock argues that "the plain language of the statute calls for application of the exemption[,]" and the anchor of its argument, understandably, is Barnes v. Department of Revenue.6
Barnes is indeed facially similar to the present case. There, the Revenue Department (now the Revenue Cabinet) assessed a use tax on purchases of houseboats that a marina "registered ... as livery or boats for hire and ... leased on a weekly basis"7 to vacationers. The Revenue Department ruled that the KRS 139.483 exemption applied only to "river-industrial vessels, such as barges and towboats," and not pleasure craft, because although the exemption was codified by the reviser of the statutes as part of the sales and use taxes chapter, KRS Chapter 139,8 it was enacted as an integral part of the Kentucky Port and River Development Commission Act,9 which was entitled "AN ACT relating to the Port and River Development and the taxation thereof," and was enacted for the purpose of "aid[ing] in the promotion and development of river-related industry, agriculture, and commerce in Kentucky[.]"10 The Court of Appeals disagreed with the Revenue Department's conclusion and observed that KRS 139.483 "contains no language excluding houseboats from the application of the exemption[,]" and "draws no distinction between industrial commercial craft and pleasure commercial craft."11 The Barnes Court then concluded "that the statute has a general application to all ships and vessels which are used primarily in the transportation of property or the conveyance of persons for hire"12 and thus held that, when the marina rented the houseboats to other persons, the houseboats were being used in the conveyance of persons for hire and "are exempt from the use tax... by virtue of KRS...
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