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The Court of Appeals Permits a Political Subdivision to Increase its Total Historic Collections Pursuant to a Change in its Base Revenue under KRS 136.650


In Commonwealth of Kentucky Fin. and Admin. Cabinet Dep’t of Revenue v. Lexington-Fayette Urban County Gov’t, No. 08-CI-01779 (Franklin Cir. Ct., Div. I, Oct. 29, 2009), on appeal, 2009-CA-002220-MR (Ky. App. Oct. 8, 2010), Motion for Discretionary Review pending, No. 2010-SC-732-D (Ky.), the Kentucky Court of Appeals (“Court”) held that because the term “base revenue” found in KRS 136.650(3) simply means the revenue resulting from the franchise fee set forth in the statute, the Lexington-Fayette Urban County Government’s (“LFUCG”) was permitted to increase its total historical collections under KRS 136.650 and 136.652.

In general, KRS 136.650 requires every political subdivision, school district and special district to report the amount it receives from the local franchise fees collected from communications service and multichannel video programming service providers to fund public education and government access programming. In addition to outlining detailed certification, calculation and distribution requirements, KRS 136.650 also states that:

If during the period between June 30, 2005, and December 31, 2005, any political subdivision had a substantial change in its base revenue by enacting or modifying the rate of a local franchise fee prior to June 30, 2005, the political subdivision may request the department to determine its certified collection amount.

KRS 136.650(3) (emphasis added).

In this case of first impression, the only issue presented to the Kentucky Court of Appeals was the proper interpretation of the term “base revenue” found in KRS 136.650(3), as the facts set forth below were not in dispute.

In 2005, the General Assembly enacted KRS 136.600 et seq., thereby creating a Telecommunications Tax and removing the authority of municipalities to levy a franchise fee on cable television providers and to levy certain property taxes on telecommunications companies. The statutes provide for a 3% tax on the retail purchase of multichannel video programming services, a 2.4% tax on all revenues received by providers of such services, and a 1.3% tax on gross revenues received by providers of communications services. A fund was established to hold the receipts of these taxes, which is administered by the Finance and Administration Cabinet (“Cabinet”). The Cabinet is responsible for allocating and distributing the funds collected to various parties, including municipality governments. These amounts are designated as monthly “hold-harmless amounts” because they are intended to replace revenue lost to local governments by the abolition of the prior local franchise fees and taxes.

As required by KRS 136.650, the LFUCG certified the amounts it historically received from local franchise fees on or before December 1, 2005. The Cabinet computed LFUCG’s “hold-harmless” payment by determining their historical collections as a ratio of the total amount collected by all political subdivision and departments. This percentage was to be LFUCG’s share of the fund and the basis for payments made by the Cabinet.

The General Assembly placed a cap on the total amount to be distributed to the localities, in the amount of $3,034,000 per month. This amount was projected to be one-twelfth of the total potential annual collections, or $36,408,000. However, the amount of historical collections was actually determined to be $42,100,000 annually, leaving the fund with a shortfall of approximately 15% in the fund. Thus, each jurisdiction received an amount 15% lower than its actual historical collection. LFUCG’s historical collections were reportedly $4,179,999.15 per year.

LFUCG filed a formal complaint with the Cabinet, in which it argued that: (1) the fifteen percent shortfall had amounted to a $613,633.71 loss in annual revenue; and (2) the Cabinet should increase historical collections in the amount of $430,342 per year, based upon the language of KRS 136.650(3) and a change LFUCG made to its “base revenue” in 2005 after it increased the franchise fee imposed on cable television providers from three percent to five percent effective February 1, 2005.

The Cabinet held an administrative hearing on January 29, 2007, and the hearing officer recommended that the Cabinet deny any additional distribution to LFUCG. The Oversight Committee approved and adopted the hearing officer's report of June 20, 2007, issuing its final ruling on August 24, 2007 (“Final Ruling”). LFUCG appealed this ruling to the KBTA. The KBTA affirmed the Cabinet’s ruling in denying LFUCG's request for an increase to cover the fifteen percent shortfall, but reversed the Cabinet's denial of LFUCG's request to increase its annual distributions by $430,342, attributable to the increase in its local franchise fee. On appeal, the Franklin Circuit Court upheld the KBTA’s order.

Based upon Kentucky’s cardinal rule of statutory construction that if a statute is not ambiguous and if the plain meaning of the words would not lead to an absurd result, the Court of Appeals determined that “the term ‘base revenue’ is not ambiguous when it is read in the context of the entire telecommunication tax legislation enacted in 2005.”

In reaching its decision, the Court determined that the clear purpose of KRS 136.650 is to “provide a method for compensating local government units for their loss of franchise fees which they would have been entitled to continue to receive had the 2005 legislation not been enacted.” More specifically, the Court concluded that under KRS 136.650(3), a political subdivision is permitted to seek an increase in the amount of its hold harmless distribution if its collection of franchise fees increased, as “subsection (3) serves to give the political subdivision an avenue to seek a larger distribution if it collected more franchise fees during the last six (6) months of 2005….”

Therefore, the Court concluded that the only reasonable interpretation of “base revenue,” based on the plain meaning of the words chosen by the General Assembly, is the revenue resulting from the franchise fee. Accordingly, the Court affirmed the Franklin Circuit Court’s opinion and order.

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