Frankfort, KY: Governor Ernie Fletcher today announced that corporations may file their tax returns in accordance with the provisions of HB 390 as enacted by the 2003 General Assembly until a resolution is reached in the Citizens National Corporation, et. al. v. The Finance and Administration Cabinet case, which is pending in Franklin Circuit Court.
"It is clear that the General Assembly never intended for all corporations to pay license tax without the benefit of HB 390,” Finance and Administration Cabinet Secretary Robbie Rudolph said. "In order to prevent this unfair and unintended result, and until the scope of the Governor's veto power under Section 88 of the Kentucky Constitution is finally resolved, the Department of Revenue advises all corporate taxpayers subject to the license tax may calculate and pay the tax in accordance with HB 390 as enacted by the 2003 General Assembly.”
For nearly three decades, Kentucky's license tax statutes have permitted domestic corporations to calculate their license tax liability using one of two options. Domestic companies meeting certain conditions were allowed to file a consolidated license tax return with its subsidiaries, or deduct from its taxable capital the investments in its subsidiaries. This alternative method for calculating taxable capital under KRS 136.071 was not available to corporations whose commercial domicile was outside the state of Kentucky. A group of out-of-state companies, led by Illinois Tool Works, Inc., filed suit against the Commonwealth and asked the Franklin Circuit Court to extend KRS 136.071 to all corporate citizens.
In December 2002, the Franklin Circuit Court agreed that the domestic preference rendered the statute unconstitutional. In response to the ITW decision, the 2003 General Assembly passed HB 390, which restored the option to file either a consolidated license tax return, or for the parent to deduct its investments in subsidiaries. The legislation also included a new provision that required corporations to increase their taxable capital by 10 percent of the difference between taxable capital calculated on a separate company basis and taxable capital calculated using the option to either take the deduction or file a consolidated return. This legislation had a one-year effective life for license tax returns due on or after April 15, 2004, but not for any period for which a return is due on or after April 15, 2005. Former Governor Patton vetoed the portions of HB 390 relating to the KRS 136.071 issue on April 3, 2003.
In response to the former Governor's veto and a subsequent Attorney General's opinion, a group of Kentucky based corporations filed suit in Franklin Circuit Court to restore HB 390 and the one-year option to file consolidated returns or take the deduction for calculating the license tax. In Citizens National, these companies asserted that HB 390 was not an appropriations bill, and because the sections of the bill Patton vetoed did not contain an appropriation, the governor had no authority to exercise his line item veto power under Section 88 of the Kentucky Constitution.
In the event that a court determines in a final and unappealable order that former Governor Patton did not exceed his line item veto authority, corporations will be required to pay the tax in accordance with the ITW decision. The Department of Revenue will not assess or collect interest or penalties attributable to any additional payment required as a result of the outcome of the Citizens National case. This directive shall apply only to license tax returns due on or after April 15, 2004, but before April 15, 2005.
The Department of Revenue will issue additional instructions to affected taxpayers within the next 10 days.
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