St. Ledger v. Com.
| Decision Date | 19 October 1995 |
| Docket Number | Nos. 94-SC-468-D,94-SC-875-DG,s. 94-SC-468-D |
| Citation | 912 S.W.2d 34 |
| Parties | Herschel ST. LEDGER, and Z. Nicki St. Ledger, Individually and on Behalf of Others Similarly Situated, Appellants/Cross-Appellees, v. COMMONWEALTH of Kentucky, Revenue Cabinet, and C. Emmett Calvert, in his official capacity as Secretary of the Revenue Cabinet, Appellees/Cross-Appellants. |
| Court | United States State Supreme Court — District of Kentucky |
Kenneth S. Handmaker, D. Randall Gibson, Augustus S. Herbert, Middleton & Reutlinger, Louisville, for appellants/cross-appellees.
Thomas A. Brown, Mark F. Sommer, Greenebaum, Doll & McDonald, Louisville Charles S. Cassis, Stephen R. Schmidt, Brown, Todd & Heyburn, Louisville, Jennifer Sartor Smart, Department of Revenue, Legal Services, Frankfort, for appellees/cross-appellants.
for amicus curiae Kentucky Chamber of Commerce.
In this appeal, we are addressing the constitutionality of Kentucky's ad valorem tax provisions. Specifically, we determine the validity of two provisions pertaining to the taxation of bank deposits located outside the Commonwealth and to certain corporate shares. KRS 132.020; KRS 132.030; KRS 136.030(1). In addition to making a determination as to these two specific provisions we have also been requested to determine the constitutionality of the entire intangibles tax scheme, if this Court finds that these two individual provisions are invalid.
The intangibles tax scheme in Kentucky levies an ad valorem tax upon intangibles, which include bank deposits and corporate shares, at the rate of 25 cents per 100 dollar value. KRS 132.020 and related statutes. However, two statutes within these provisions create the questions that are being considered here.
KRS 132.030 effectively lessens the amount of tax upon "deposit[s] in any bank, trust company, or combined bank and trust company organized under the law of this state, or in any national bank of this state." For in-state accounts the rate is lowered from the 25 cents per 100 dollars of value cited in KRS 132.020 to one-thousandth of one percent (0.001%) on the amount of the holding. KRS 132.030(1). The rate of taxation on certain corporate shares is modified by KRS 136.030 [hereinafter "the exemption statute"]. This statute creates an exemption for shareholders of corporations that "pays taxes to the state of Kentucky on at least 75% of its total property, wherever located." KRS 136.030(1)(a).
Appellants assert that these specific provisions are unconstitutional under U.S. Const. Art. I, sec. 8, Cl. 3, the commerce clause; U.S. Const. Amend. XIV, sec. 1, equal protection clause; and under Ky. Const. secs. 3 and 171, the equal protection provision and the classification, uniformity, and equality provision.
The Jefferson Circuit Court certified two classes, those who hold bank deposits in out-of-state banks and those who own stock in corporations that do not qualify for the exemption outlined in KRS 136.030(1). After a bench trial, the Circuit Court found that the exemption statute is "obviously unenforceable as written" and is "so incomplete or conflicting in provisions that [it] cannot be executed and will be declared void." As a result of this conclusion, the Circuit Court did not reach the commerce clause question on the exemption statute. As to the modified tax rate on bank deposits held in in-state banks, the Circuit Court concluded the statute violated the commerce clause and was unconstitutional. The Circuit Court also held that out-of-state bank deposits were to be taxed in the same manner as in-state deposits. Further, the Circuit Court held that appellants were entitled to apply for refunds of taxes paid for the preceding two year period pursuant to KRS 134.590.
The Court of Appeals reversed, holding the exemption statute enforceable and valid. The Court of Appeals further held that the entire intangibles tax scheme did not violate the Equal Protection Clause of the U.S. Constitution and the similar provision in the Kentucky Constitution, sec. 3. As to the commerce clause issues, the Court of Appeals determined that both provisions were constitutionally valid. The corporate shares tax was deemed valid under a "compensatory tax" theory and the bank deposits tax fell outside of the commerce clause protection since the bank deposits did not "fall into the category of interstate commerce."
We first turn to the issue of the tax on bank deposits. It is clear to this Court that KRS 132.030 changes the rate of taxation on domestic bank accounts as compared to those accounts held in institutions located In Madden, Kentucky created two different classes of people, those who had accounts in Kentucky banks and those who had deposits in out-of-state institutions. The United States Supreme Court concluded that the state had a legitimate purpose when taxing out-of-state accounts at a higher rate due to the expense of collecting taxes on those accounts. Therefore, the Court held that the bank deposits tax did not violate the equal protection clause. The same reasoning applies in this case.
out-of-state. Appellants assert that this provision is violative of the equal protection provisions of both the Kentucky and U.S. Constitution as well as the Commerce Clause. The questions regarding violations of equal protection principles have already been addressed by the United States Supreme Court in Madden v. Commonwealth of Kentucky, 309 U.S. 83, 60 S.Ct. 406, 84 L.Ed. 590 (1940). This Court concludes that Madden is dispositive and controlling, and therefore reversal is not warranted on this issue
Appellants urge this Court to recognize that the United States Supreme Court's holding in Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 105 S.Ct. 1676, 84 L.Ed.2d 751 (1985), heightened the standard applied in Madden in fact situations similar to the one under review. Appellants characterize Metropolitan Life Ins. as follows: "We hold that under the circumstances of this case, promotion of domestic business by discrimination against nonresident competitors is not a legitimate state purpose." Id. at 882, 105 S.Ct. at 1683. However, this court understands that the purpose of the higher tax on out-of-state bank deposits is to cover the increased costs of collection of that tax. This classification of taxable groups is not "based solely upon an in-state/out-of-state characterization" as appellants assert. As a result, this court cannot hold that this tax is violative of the equal protection clause.
Appellants also urge this Court to conclude that the bank deposits tax fails under Kentucky Constitution sec. 171. Appellant maintains that the bank deposits tax is not "uniform upon all property of the same class." Kentucky Constitution, sec. 171. In order for this tax to satisfy the mandate of sec. 171 of the Kentucky Constitution, the classification which distinguishes in-state accounts from out-of-state accounts must not be "artificial, arbitrary [or] unreasonable." Gillis v. Yount, Ky., 748 S.W.2d 357, 363 (1988).
To make this determination, we must decide whether the classification "is ... related to the constitutionally permissible classification for tax purposes." id. The purpose of this distinction is related to the increased costs of the tax collection on out-of-state accounts. We find this classification "depend[s] upon natural, real [and] substantial distinctions, inhering in the subject matter, such as suggest the necessity for ... independent legislation in regard to the class specified." Gillis, 748 S.W.2d at 363, quoting Bd. of Educ. of Jefferson Co. v. Bd. of Educ. of Louisville, Ky., 472 S.W.2d 496, 498 (1971). Therefore, KRS 132.030 does not violate the Kentucky Constitution.
Next, we turn to the question of the commerce clause and its effect on the validity of this statutory provision. After undertaking a constitutional analysis of this issue, the Court of Appeals concluded that the tax was constitutional and not in violation of the commerce clause. This holding was based upon the premise that the commerce clause did not apply to the bank deposits tax because bank deposits do not constitute interstate commerce. The Court of Appeals stated:
"All objects of interstate trade merit Commerce Clause Protection; none is excluded by definition at the outset." City of Philadelphia v. New Jersey, 437 U.S. 617, 622, 98 S.Ct. 2531, 2534, 57 L.Ed.2d 475, 480 (1978). It complements reason that if the object being taxed is not one of interstate trade the commerce clause will not apply.... [T]he imposed tax herein is not on an object of interstate trade, it is an ad valorem property tax on bank deposits. While it seems likely that a deposit in a bank established in several states would be an object in interstate commerce, there is no possibility of that here.
The Court of Appeals determined that KRS 287.030(3) prohibits the finding that these No bank incorporated under the laws of another state or national bank having its principal place of business outside this state shall transact any banking business in this state except to lend money.
deposits are objects of interstate commerce. The statute states
This Court cannot agree with this conclusion. While it may be tempting to ascertain that because of this statute, the deposits are not items of interstate commerce, the purposes of the United States Constitution may not be thwarted. This Court recognizes that we must enforce constitutional limitations. "[W]e must apply the Constitution ... for to do otherwise would breach the social compact which binds us one to another and would amount to an abdication of judicial responsibility." Fischer v. State Board of Elections, Ky., 879 S.W.2d 475 (1994).
There is no question but that deposits made by in-state residents in banks located out-of-state are anything but interstate transactions, falling under the protective...
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