Occupational License Fee May Be Imposed On Capital Gains On Sale Of Taxpayers’ Business Assets
In Meadows Health Systems East, Inc. et al v. Louisville/Jefferson Co. Metro Revenue Comm’n, No. 2009-CA-001839 (Ky. App. Aug. 3, 2012), aff’g, No. 04-CI-004267 (Jefferson Cir. Ct., Sep. 16, 2009), the Kentucky Court of Appeals (Court) affirmed the Jefferson Circuit Court’s decision that capital gains from the sale of the taxpayers’ business assets not in the ordinary course of business should be included in “net profits” and thus be subject to the local occupational license fee.
Meadows Health represents an important decision that practitioners should watch as it appears to have discerned a broad authority for a locality to impose an occupational license fee on net business profits under Section 181 of the Kentucky Constitution, a section which has previously been held to embrace activities related to “all ‘trades, occupations and professions’” and to be “as far reaching and as sweeping as language” could be in terms of a locality’s authority to tax. City of Louisville v. Sebree, 214 S.W.2d 248, 252 (1948).
The involved taxpayers were Kentucky corporations that owned and operated two long-term health care facilities in Jefferson County, Kentucky (collectively, Meadows Health). In 2002, Meadows Health sold substantially all of their respective assets in the facilities to a Florida company, resulting in a complete divestiture of Meadow Health’s Jefferson County business operations. Meadows Health took the position that Section 3.1 of the Louisville/Jefferson County Revenue Commission’s Regulations (the Regulations), which subjected capital gains from the sale of a business to the local occupational license fee as part of a company’s “net profits,” violated Section 181 of the Kentucky Constitution and KRS 91.200. So, Meadows Health filed its 2002 Occupational License Return and tendered an estimated payment under protest.
Kentucky Constitution Section 181 authorizes the General Assembly to “delegate the power to counties, towns, cities and other municipal corporations, to impose and collect license fees…on franchises, trades, occupations and professions.” KRS 91.200 was enacted to implement the authority granted by Section 181 by allowing a city to impose a licensee fee on “[t]he net profits of all businesses, professions, or occupations from activities conducted in the city.” The City of Louisville and Jefferson County enacted an ordinance imposing an occupational license fee on net profits, and the Revenue Commission promulgated the involved Regulations. Regulation 3.1 provides that “gains realized from the sale of a business,” such as Meadow Health’s sale of its business assets, are subject to the licensee fee as net profit “if the person receiving the gain has been engaged in the business within the City/County at any time.”
Meadows Health claimed that selling nearly all of its business assets did not come within KRS 91.200 as a part of a business as contemplated and limited by Kentucky Constitution Section 181, but were instead isolated or single transactions not subject to the local occupational license fee. Therefore, Meadows Health took the position that the Regulations subjecting its sale of business assets to the licensee fee violated Section 181 of the Kentucky Constitution and KRS 91.200. The Court of Appeals, however, agreed with the Circuit Court and held that although Meadows Health’s sale of its business assets was not a normal business transaction, it was nonetheless an undertaking that was conducted for profit and thus, the transactions were still in the “realm of ‘business activity’” and the resulting capital gains could still be considered “net profit” and properly subject to the local occupational license fee.