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The General Assembly’s Suspension of a Statute in a Budget Bill to Remove Restrictions on Transferring Charitable Gaming License Fees Converts the Fee to a Tax on Non-Profit Entities

02.23.2011

In Louisville Soccer Alliance, Inc., et al v. Steven L. Beshear, Governor, et al,No. 08-CI-1208 (Franklin Cir. Ct., Div. I, Feb. 1, 2011), the Franklin Circuit Court (“Court”) held that the General Assembly’s allowance of transfers of charitable gaming license fee funds from a restricted account to the state’s General Fund by suspending KRS 238.570’s restrictions against transfer of such funds, converted the fee to an illegal tax on non-profit entities licensed by the state to conduct charitable gaming.  The Court also held that the such transfers are not authorized under KRS 48.315.

By way of background, the General Assembly enacted the Charitable Gaming Act (“Act”) in 1994 to provide a comprehensive regulatory program for the licensing and regulation of all charitable gaming in Kentucky.  More specifically, the Act established a fee of 0.53% of gross receipts pursuant to KRS 238.570(1) to be levied on all licensed charitable gaming operations in Kentucky to fully fund the state oversight and regulation of charitable gaming.  Further, KRS 238.570(2) required that all funds from the license fees must be deposited in a restricted account and those funds not used must be carried forward to the next fiscal year. 

In 2008, the General Assembly suspended KRS 238.570, via the Budget Bill, to lift KRS 238.570’s restrictions on the transfer of additional charitable gaming license fees and the ability of the Commonwealth’s Department of Charitable Gaming (“Department”) to increase license fees imposed on charitable gaming operations.  More specifically, the suspension of KRS 238.570 allowed annual charitable gaming license fee funds collected but not used to be transferred from its restricted fund to the Commonwealth’s General Fund, as well as allowed the Department to increase the license fees imposed against charitable gaming operations to 0.60% of gross receipts.

KRS 238.570’s charitable gaming license fee has withstood previous challenges to its constitutionality in Commonwealth v. Louisville Atlantis Community/Adapt, Inc., 971 S.W.2d 810, 815 (Ky. App. 1997), as the Court of Appeals held that it was a “regulatory fee,” not an illegal tax on public charities.  In the instant case, however, Louisville Soccer Alliance, Inc., the Catholic Conference of Kentucky, and various other affiliated groups and individuals (collectively, the “Plaintiffs”), alleged that the license fee was converted to a tax after the “General Assembly’s unlawful fund transfer of the restricted account into the general fund of revenue ….”  Thus to the extent that license fees remaining in the restricted fund after funding the Department’s annual licensing and regulation of charitable gaming are transferred to the state’s general fund, the Plaintiffs believed that it was no longer a fee, but rather a tax.  Ultimately, the Court agreed, holding that “any ‘restricted’ fund under state control has become, for all practical purposes, a tax which is deposited into the state’s general fund….” 

In Commonwealth, ex rel. Armstrong v. Collins, 709 S.W.2d 437 (Ky. 1986), the Kentucky Supreme Court upheld the power of the General Assembly to temporarily suspend statutes relating to the appropriations of public funds in the state budget.  Although the Court acknowledged that the General Assembly’s suspension of statutes “have now become a way of life” in helping balance the state budget, the Court held that “the power to suspend statutes in the budget is not unlimited.”  Thus, although Section 15 of the Kentucky Constitution specifically permits the General Assembly to suspend laws, the Court believed that “there is considerable doubt about the constitutional validity of the legislative practice of routinely and repeatedly suspending statutes in the budget, to the point that many statutes remain law in name only.” 

Further, the Court stressed that the General Assembly’s authority to suspend an existing statute pursuant to a Budget Bill under Armstrong is limited only to financial emergencies.  In the present case, however, the Court held that the General Assembly unlawfully extended its authority to suspend statutes under Armstrong beyond any meaningful limits and ignored the plain constitutional restrictions of Sections 51 and 180 of the Kentucky Constitution by routinely suspending multiple statutes in the Budget Bill.

Additionally, although KRS 48.315 identifies several statutes that the General Assembly may make fund transfers to the General Fund in a Budget Bill, KRS 238.570 is not named.  Thus, the Court held that KRS 48.315 provided no independent basis for the General Assembly to transfer additional charitable gaming license fee funds from the restricted account to the General Fund.

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.

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