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Any Entity Furnishing Utility Services, Whether A Public Utility or Not, Is Subject to the Utility Gross Receipts License Tax

01.04.2012

In Dep’t of Revenue v. Saint Joseph Health System, Inc., et. al., Civil Action No. 08-CI-2182 (Fayette Cir. Ct. 2010), rev’d Case No. 2010-CA-1159-MR (Ky. App. Oct. 7, 2011), petition for rehearing filed (Ky. App.), the Kentucky Court of Appeals determined that a broker, Constellation New Energy – Gas Division, LLC (“Constellation”), which furnished natural gas to a hospital corporation, Saint Joseph Health System, Inc. (“Saint Joseph”), was liable for the utility gross receipts license tax (“UGRLT”) pursuant to KRS 160.593 and KRS 160.619 as it provided utility services, despite not being a regulated public utility.

The Kentucky General Assembly has authorized school districts to levy the UGRLT to fund education by allowing the imposition of the UGRLT, not to “exceed three percent of the gross receipts derived from the furnishing, within the district, of utility services….” KRS 160.613(1). The UGRLT is paid to the Kentucky Department of Revenue (“Department”), which then distributes the payments to the school districts.

Typically, responsibility for paying the UGRLT under KRS 160.613 falls upon the utility supplier. In the present matter, however, the Board of Education of Fayette County (“Board”) levied the UGRLT against Saint Joseph, as the consumer of natural gas, by claiming that a consumer of gas (here, Saint Joseph) is liable for payment of the UGRLT under KRS 160.613(2) if it purchased the gas directly from a third party utility broker (here, Constellation), rather than from a regulated public utility company. Saint Joseph paid the UGRLT alleged to be due under protest to the Department and then filed a Complaint and Petition for a Declaration of Rights in the Fayette Circuit Court alleging that the Board had erroneously imposed upon it the UGRLT and naming the Board, the Department and Constellation as defendants.

Saint Joseph, a nonprofit corporation with tax-exempt status under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, and a public charity under Section 170 of the Kentucky Constitution, did not disagree with the Board’s interpretation of KRS 160.613(2), but instead argued that it was exempt from the UGRLT as an institution of public charity. Constellation agreed with the Board’s decision by arguing in its Answer that Saint Joseph was liable for the UGRLT because Constellation was an exempt third party gas broker, as well as under the terms of its contract with Saint Joseph. In addition, the Department filed an Answer alleging that the Circuit Court lacked subject matter jurisdiction because Saint Joseph did not exhaust its administrative remedies.

The Fayette Circuit Court held, on a motion for summary judgment, that Saint Joseph was liable for the UGRLT because Constellation was not a regulated public utility company and because Section 170 of the Constitution provides an exemption to public charities only for real property taxes, not excise taxes such as the UGRLT. The Circuit Court did not address the Department’s argument that the court lacked subject matter jurisdiction.

On appeal, the Kentucky Court of Appeals (“Court”) was asked to determine whether: (1) the legal incidence of the UGRLT by the Board fell upon Saint Joseph on natural gas it bought from Constellation, or upon Constellation, as a broker that furnished gas to Saint Joseph; and (2) if the legal incidence of the UGRLT fell upon Saint Joseph, whether it was exempt from paying the levy as a public charity.

As an initial matter, the Court held that the Circuit Court had subject matter jurisdiction because Saint Joseph did not need to exhaust its administrative remedies. This was because the only applicable statute that required an exhaustion of administrative remedies in the underlying circumstances was KRS 160.6151, which only applies to a “utility service provider” seeking a refund or credit for an overpayment of the UGRLT, not to consumers of the UGRLT, such as Saint Joseph. Thus, Saint Joseph was not required to seek relief directly from the Department before filing an action in court.

Next, in a matter of first impression, the Court addressed whether the UGRLT, pursuant to KRS 160.613, “applies only to utilities, or applies to everyone who furnishes utility services.” The Court rejected the argument that the Kentucky General Assembly intended to restrict the UGRLT’s application only to utilities regulated by the Public Service Commission simply because KRS 160.613 uses the term “utility.” The Court held that “this is a strained reading of the statute and at odds with the…rules of statutory construction” as it would “impermissibly add[] words to the statute that are not reasonably ascertainable from the language used.” Thus, the Court held that it must read the plan language of the statute because if “the General Assembly intended the utility tax to apply only to regulated utilities, it certainly could have said so, but it did not….”

Therefore, the Court held that “any entity, whether regulated as a public utility or not, that furnishes utility services…derives utility gross receipts from the furnishing of those utility services and thus, is subject to the imposition of the utility tax.” Accordingly, because Constellation furnished gas to Saint Joseph, Constellation was liable for the UGRLT. A Petition for Rehearing has since been filed with the Court.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.


Bingham Greenebaum Doll LLP is a progressive business law firm with nearly 250 professionals serving regional, national and international clients. For more information, visit www.bgdlegal.com.

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