Hazard, the Perry County seat, on March 26, 2024. (Photo by Austin Anthony)
A Franklin Circuit judge has given a legal victory to Hazard and several other Kentucky cities interested in imposing a restaurant tax.
The tax, created by the legislature in 1980, is levied in about 50 of Kentucky’s 418 cities on retail sales of food and beverages in all restaurants in the city. The tax rate is not to exceed 3% and revenue from it is to be used to promote tourism.
Hazard sued the state, claiming it was being discriminated against by not qualifying to enact the tax. Several other cities joined in the suit.
Hazard Mayor Donald “Happy” Mobelini on Wednesday said he was “elated” with the judge’s order and hopes that the city commission will take up implementing a restaurant tax at Monday night’s meeting. He said amenities that appeal to tourists can improve the quality of life for residents as well.
“I don’t think there will be a ‘no’ vote,” he said. “We’re in such a disadvantaged position here. We want to take care of our kids. We want to do for our kids what other communities are doing with things like recreational areas” that the mayor said will also draw visitors.
Logan Fogle, spokesman for the state Department for Local Government, said the court ordered the department “to take all necessary and appropriate steps to implement the order, specifically by including Hazard on the list of eligible cities to impose the tax and by including all similarly situated cities, like Ashland, on the list.”
Gov. Andy Beshear was dismissed from the case earlier by agreed order and the attorney general’s office intervened to defend the state.
Kevin Grout, a spokesman for Attorney General Russell Coleman, said Wednesday the office is reviewing whether to appeal the order.
Unconstitutionally arbitrary
Meanwhile, a director of the Kentucky League of Cities warned that no city should immediately try to impose the tax based on the Franklin Circuit Court ruling because it was not final.
In a 21-page decision issued Monday, Franklin Circuit Judge Phillip Shepherd took issue with parts of a state law — KRS 91A.400 — that says which cities may impose the tax.
Before 2015, Kentucky’s cities were divided into six classes based on their population at the time of classification. There were more than 400 classification-related laws on the books that affected issues like public safety, alcoholic beverage control and revenue options.
After Jan. 1, 2015, that classification of cities was changed, making Louisville and Lexington 1st-class cities and others home rule class.
The amended restaurant tax law allowed the state Department of. Local Government to maintain a list of “authorized cities” that as of Jan. 1, 2014, were classified as cities of the 4th- or 5th-class.
The law said in addition to a 3% transient room tax placed on lodging, the legislative body in an authorized city could levy a tax on tourism.
Shepherd said the restaurant tax law makes an unconstitutionally arbitrary distinction of cities eligible to enact the restaurant tax based on population and classification status on an arbitrarily chosen date, Jan. 1, 2014.
“The statute arbitrarily fails to provide a means of migration for cities whose population after January 1, 2014, either enters or exits throng of 4th and 5th class cities.”
The judge added that the law “fails to provide a pathway to correct the misclassification of cities like Hazard, whose population has always met the statutory criteria for belong tin in the 4th class (with the authority to enact the restaurant tax) rather than the 3rd class.”
But Shepherd declined to hold all of the law unconstitutional, especially in light of the financial reliance some cities have on the tax.
He noted that many tourism projects have been funded by cities authorized to levy the restaurant tax and that many bonds are financed using proceeds generated by the tax.
He said “the proper remedy” is to sever parts of the statute that violate the Kentucky Constitution’s prohibition on arbitrary legislation.
Those parts arbitrarily authorize some cities to impose a restaurant tax based on historical class and leave similarly situated cities without the ability to impose the tax.
The judge also ordered that the Governor’s Office of Local Government include on the list of eligible cities to levy the restaurant tax all similarly situated cities, like Ashland, with population ranges within the parameters of cities that had been classified 4th- or 5th-class.
Hazard and similarly situated cities with populations under 8,000 should be included on the list of cities eligible to levy the tax, the judge said.
“This ruling does not declare that those cities like Elizabethtown or Oak Grove, with current population totals over the 4th class population cap of 8,000 are no longer authorized to levy and rely on the tax,” said Shepherd.
He stressed that the Governor’s Office of Local Governments is directed to include Hazard on the list of cities eligible to impose the tax.
Shepherd said the state’s previous classification system for cities “is frozen in time based on population figures that have now changed or were initially misclassified.”
For clarity, he wrote, the now-repealed city-classification system directed that 3rd-class cities have populations between 8,000 and fewer than 20,000. Cities of the 4th class have populations of 3,000 or more, but fewer than 3,000.
Shepherd said Ashland maintains it has never had a population in this century or last that was as low 8,000, and it was misclassified.
Cities advised to proceed cautiously
Morgain Patterson, director of municipal law for the Kentucky League of Cities, said in an article on the KLC website that the cities of Bardstown, Beaver Dam, Berea, Elizabethtown, Kuttawa, Madisonville, Morehead, Pikeville and Prestonsburg intervened in the lawsuit as former 4th- and 5th-class cities eligible to assess the restaurant tax.
“These cities argued that the restaurant tax statute is constitutional and that invalidating it would cause catastrophe economic harm to those cities that impose the tax,” she said.
But, said Patterson, the judge’s order “purports to expand the number of cities that can assess there restaurant tax on a prospective basis, but the language of the ruling is unclear as to which cities that may include, except that it specifies the city of Hazard is eligible.”
She stressed that the order “is not final and should not serve as a basis for a city to adopt a new restaurant tax.”
Patterson said the order “clearly preserves the right of cities that currently assess a restaurant tax to continue to do so.”
She said the parties in the lawsuit have 10 days from the date of the order to file motions to alter, amend or vacate.
If a motion is filed, that extends the deadline for a party to appeal the decision, she said. Once the court rule on that motion, the parties have 30 days to file an appeal.
Hazard, along with Perry County Fiscal Court, filed the suit in ?January 2023. Shepherd dismissed Perry County as a plaintiff.