The Kentucky Court of Appeals has reversed a lower court’s decision regarding the City of Hazard’s ability to impose a restaurant tax. The ruling, delivered on October 3, 2025, sides with the Commonwealth of Kentucky, represented by Attorney General Russell Coleman, and clarifies the application of Kentucky Revised Statute (KRS) 91A.400, which governs the restaurant tax.
Background of the Case
The case centered on KRS 91A.400, a law that allows certain cities to levy a tax on restaurant sales. The statute, as it currently stands, permits cities that were classified as fourth or fifth class cities as of January 1, 2014, to impose this tax. The City of Hazard, despite its population size, was technically classified as a third-class city. This, according to the statute, meant Hazard was ineligible to collect the tax.
The Franklin Circuit Court’s Decision
The Franklin Circuit Court initially sided with Hazard, declaring KRS 91A.400 unconstitutional as applied to the city. The circuit court argued that the statute created an arbitrary classification by granting taxing authority to similarly situated cities while denying it to Hazard, without a rational basis for the distinction. The court ordered the Governor’s Office of Local Government to include Hazard on the list of cities eligible to impose the restaurant tax.
The Court of Appeals’ Reasoning
The Court of Appeals disagreed with the circuit court’s findings, overturning its decision and remanding the case for dismissal. The appellate court determined that KRS 91A.400 is constitutional, even when applied to Hazard. Moreover, the court ruled that Hazard was barred from receiving the relief granted by the circuit court due to considerations of equity, specifically the doctrine of laches.
Key Points of the Court’s Decision
* Standing: The court affirmed that Hazard did have standing to bring the lawsuit, as it had a judicially recognizable interest in the subject matter.
* Separation of Powers: The court emphasized the importance of the separation of powers, stating that the judiciary cannot grant the power to tax, as that authority lies solely with the General Assembly. The court found that the circuit court’s order to include Hazard on the list of eligible cities was an overreach of its authority.
* Constitutionality of KRS 91A.400: The Court of Appeals found that the statute was constitutional, as the legislature had a rational basis for its classification. The court reasoned that the cut-off date of January 1, 2014, was reasonable, as it coincided with the change in the city classification system.
* Laches: The court invoked the doctrine of laches, finding that Hazard had waited an unreasonable amount of time to challenge its classification. The court noted that Hazard had been misclassified for decades, yet took no action to correct it until it sought to impose the restaurant tax. The court found that allowing Hazard to benefit from the tax after such a delay would be inequitable.
Historical Context and the Evolution of City Classification
The court’s opinion delves into the historical context of city classifications in Kentucky, highlighting the evolution from a system based on population classes (established by Section 156 of the Kentucky Constitution) to a system based on the form of government (as authorized by Section 156a). The court noted the problems of the old system, where cities were often not in the correct class according to population. The court cited the 1994 amendment to the constitution that replaced Section 156 with Section 156a. The opinion also highlights that the old classification system was in effect for twenty more years until 2014 when the General Assembly enacted House Bill 331.
Implications of the Ruling
The Court of Appeals’ decision reinforces the legislative authority over taxation and city classification. It also underscores the importance of timely legal challenges. The ruling means Hazard will not be able to impose the restaurant tax at this time.
The Court’s Concerns
The court expressed concerns about Hazard’s actions, particularly its decision to enact the tax during the litigation, despite being warned that it was doing so “at its own peril.” The court also noted that the General Assembly can address the classification inaccuracies.
The Future of the Restaurant Tax
The ruling does not affect the ability of other cities that were properly classified as of January 1, 2014, to continue collecting the restaurant tax.