Request By:
Mr. Sam D. Milam
President
Coca-Cola Bottling Co. No. 5, Inc.
Tucker Schoolhouse Road
P.O. Box 370
Madisonville, Kentucky 42431
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Charles W. Runyan, Assistant Deputy Attorney General
We hereby reproduce your letter raising an interest question relating to sales tax assessments, since it refers to the law, the circumstances involved, and the request for our opinion. The letter reads:
"THE LAW: Since July 1, 1982, the Department of Revenue has been charging interest on sales tax assessments according to KRS 139.650 and 131.183 as amended by House Bill 402 approved by the 1982 General Assembly. In general, assessments for additional tax due issued since July 1 have carried an interest rate of 16 percent regardless of the tax period involved. Under previous law, assessments for overdue taxes carried the statutory interest rate in effect for the period during which the liability occurred. Therefore, such a significant policy change could cause retroactive enforcement of an interest rate to periods prior to the effective date of July 1, 1982.
"CIRCUMSTANCES INVOLVED: In January of 1982 the Department of Revenue began an audit for payment of Sales and Use Taxes by Coca-Cola Bottling Co. No. 5, Inc., a Kentucky corporation. In August of 1982 a notice of tax due for unpaid Sales and Use Taxes for years 1976, 1977, 1978, 1979, 1980 and 1981 was issued by the Department. Included in the assessment was interest on the amount due computed from the original due date of sales tax returns to September 2, 1982, at a rate of 16 percent. Even though, prior to House Bill 402, interest on sales tax assessments was set at 8 percent (the rate effective from 1976 to June 30, 1982) the interest computed on Coca-Cola Bottling Co. No. 5, Inc. by the Department of Revenue for the time running from 1976 to June 30, 1982 was set at 16 percent.
"OPINION REQUESTED: We request your opinion on (1) Are the preceding circumstances a proper enforcement of KRS 139.650 and 131.183 and (2) If this enforcement is proper then is such a law causing a retroactive change in statutes, namely interest rates under KRS 131.183 and 139.650 constitutionally acceptable."
Prior to the 1982 amendment of KRS 139.650, that statute provided as follows:
"In every case, any tax not paid on or before the due date shall bear interest at the rate of eight per cent (8%) per annum from the date due until the date of payment. "
In 1976 (Ch. 155, § 21), KRS 139.650 (originally enacted in 1960) was amended to provide that the interest on delinquent taxes was eight percent (8%). The interest rate was originally established as six percent (6%).
KRS 139.650, as amended in 1982 (H.B. 402, Ch. 452, § 20), reads:
"In every case, any tax not paid on or before the due date shall bear interest at the tax interest rate as defined in KRS 131.010(6) from the date due until the date of payment. "
KRS 131.010(6), as amended in 1982 (H.B. 402, Ch. 452, § 1) reads:
"'Tax interest rate' means the interest rate determined under KRS 131.183."
KRS 131.183(1) (H.B. 402, Ch. 452, § 3) reads:
"(1) All taxes payable to the Commonwealth not paid at the time prescribed by statute shall accrue interest at the tax interest rate. The tax interest rate for tax liabilities that are assessed on or after July 1, 1982 shall be sixteen percent (16%). This interest rate shall apply until January 1, 1983, when the tax interest rate shall be adjusted as provided in this section. The commissioner of revenue shall adjust the tax interest rate not later than November 15 of any year, beginning in 1982, if the adjusted prime rate charged by banks during October of that year, rounded to the nearest full percent, is at least one (1) percentage point more or less than the tax interest rate which is then in effect. The tax interest rate shall be equal to the adjusted prime rate charged by banks rounded to the nearest full percent, and shall become effective on January 1 of the immediately succeeding year."
KRS 139.650, as amended in 1982, 131.010(6) as amended in 1982, and 131.183 became effective on July 1, 1982.
You say that in general, assessments for additional tax due issued since July 1, 1982, have carried an interest rate of sixteen percent (16%), regardless of the tax period involved. You specifically wrote that in August, 1982, the Kentucky Department of Revenue gave your company, Coca-Cola Bottling Co. No. 5, Inc., a notice of tax for unpaid sales and use taxes for the years 1976, 1977, 1978, 1979, 1980 and 1981. You further stated that included in the tax liabilities assessment was interest on the amount due, computed from the original due date of sales tax returns to September 2, 1982, at a rate of sixteen percent (16%).
Question No. 1 is whether or not the sixteen percent (16%) rate of interest can be applied to taxes due prior to July 1, 1982?
"In the construction of a statute, the giving of a retroactive effect is not favored. . . . Such an effect will be given to the statute only when it is the manifest intention of the legislature, or the statute clearly and strictly declares its retroactivity. " (Emphasis added).
City of Covington v. Sohio Petroleum Company, Ky., 279 S.W.2d 746 (1955). In order that a statute be construed as being retroactive, a clearly expressed intent for retroactive application is necessary. See
Dean v. Gregory, Ky., 318 S.W.2d 549 (1958); and
Roberts v. Hickman County Fiscal Court, Ky., 481 S.W.2d 279 (1972).
When KRS 139.650, 131.010(6), and 131.183, are viewed in pari materia, the legislative intent is that any tax not paid on or before the due date shall bear interest at the "tax interest rate. " (Emphasis added). In turn, KRS 131.010(6) defines "tax interest rate" as the interest rate determined under KRS 131.183. The first sentence of KRS 131.183(1) simply states: "All taxes payable to the Commonwealth not paid at the time prescribed by statute shall accrue interest at the tax interest rate. " (Emphasis added). This simply means (since there is no contrarily expressed intent) that the tax interest rate is that rate in effect the next day after the tax became due and such tax remained unpaid. This means ultimately the prospective application of the interest rate, as calculated under the statutory changes in the rate. Then in the next sentence of KRS 131.183 it is written that: "The tax interest rate for tax liabilities that are assessed on and after July 1, 1982, shall be sixteen percent (16%)." (Emphasis added). This suggests that the tax interest rate on any delinquent taxes (regardless of the year) on and after July 1, 1982, shall be sixteen percent (16%). However the sixteen percent (16%) rate is not to be retroactively applied to such delinquent taxes.
As we pointed out above, the interest rate on overdue taxes under KRS 139.650 was first six percent (6%) in 1960, the year of original enactment. In 1976 the statute was amended to provide a tax interest rate of eight percent (8%). In 1982, the statute was amended such that the tax interest rate became sixteen percent (16%) on and after July 1, 1982. It is our opinion that the interest rate to be applied to these delinquent taxes must be applied prospectively and during the period for which the tax interest rate was effective, such that the cumulative tax interest will be developed as just stated.
In arriving at our conclusion as to the prospective application of the changing tax interest rate, we applied the doctrine of pari materia. Statutes in pari materia should be construed together so that effect may be given to all of the provisions of each if fairly and reasonably such construction is possible.
Pendennis Club v. Alcoholic Beverages Control Board, 287 Ky. 49, 151 S.W.2d 438 (1941). As to due dates on sales and use taxes, in the context of KRS 139.540 and 139.650, see
Kentucky Bd. of Tax Appeals v. Brown Hotel Co., Ky., 528 S.W.2d 715 (1975) 719.
Technically, it is possible that a theory of retroactive application of the sixteen percent (16%) rate could be argued, since KRS 131.183(1) uses the language: "The tax interest rate for tax liabilities that are assessed on and after July 1, 1982, shall be sixteen percent (16%)." It might be argued that "tax liabilities assessed" was a cumulative concept embracing any taxes due, regardless of the year. However, under this somewhat ambiguous situation, we believe the courts would not invoke the retroactivity of the tax interest rate, as stated above. Indeed the courts have ruled that a statute should be so construed as to make it equitable and just.
City of Covington v. Sohio Petroleum Co., Ky., 279 S.W.2d 746 (1955).
And finally, the courts have held that tax statutes must be strictly construed and doubts resolved in favor of the taxpayer. The court said in
George v. Scent, Ky., 346 S.W.2d 784 (1961) 789:
"Taxing laws should be plain and precise, for they impose a burden upon the people. That imposition should be explicitly and distinctly revealed. If the Legislature fails so to express its intention and meaning, it is the function of the judiciary to construe the statute strictly and resolve doubts and ambiguities in favor of the taxpayer and against the taxing powers.
Frank Fehr Brewing Co. v. Commonwealth, 296 Ky. 667, 178 S.W.2d 197."
See also
George Wohrley, Inc. v. Commonwealth, Dept. of Rev., Ky., 495 S.W.2d 173 (1973) 175. Of course the interest on delinquent taxes is purely an incidental of tax law.
Your second question is whether or not the retroactive application of the sixteen percent (16%) interest rate on delinquent taxes is constitutionally acceptable.
Since we concluded that retroactive application of interest rates is not intended, that question is moot.