Tax in the Bluegrass
Kentucky's local restaurant taxes
Issue 1
March 10, 2025
By Mark A. Loyd, JD, CPA
Kentucky cities derive their taxing authority from the General Assembly, which can classify cities and treat them differently. The City of Hazard challenged KRS 91A.400, which authorizes a limited number of smaller cities to impose restaurant taxes, because the City wants to levy a restaurant tax but falls in a class of cities that cannot do so. Hazard’s challenge merits an exploration of its implications, the court decision, and the potential impact on the broader framework of local taxation in Kentucky.
Kentucky’s local restaurant tax imposed by certain small cities
KRS 91A.400 allows cities classified as fourth or fifth class as of January 1, 2014, to levy a restaurant tax of 3 percent of restaurant sales. The statute was enacted using a classification system of six city classes.
The General Assembly has long had the authority to create and govern Kentucky cities, including the power to classify cities and delegate specific powers, such as the authority to levy taxes. The current system classifies cities based on historical status, population, and other criteria, maintaining the status quo while allowing for specific classifications like that used for the authority for a city to enact a restaurant tax.
Hazard argues that it should be able to impose a restaurant tax
Hazard is ineligible under KRS 91A.400 to enact a restaurant tax. Other cities which had less population and more population than Hazard were eligible. Hazard initiated a lawsuit in Franklin Circuit Court against the Commonwealth of Kentucky. The City argued that KRS 91A.400 arbitrarily restricts the ability to levy a restaurant tax based on outdated city classifications and is thus unconstitutional under multiple theories.
The Franklin Circuit Court agreed with Hazard
The Franklin Circuit Court agreed with Hazard, applied rational basis scrutiny, and found that the statute’s fixed-date classification was arbitrary and did not account for changes in city populations or reclassification needs. The Court also found the statute to be both under-inclusive and over-inclusive, allowing some cities with smaller or larger populations than Hazard to levy the tax while excluding Hazard.
Court’s order could expand restaurant taxes to all cities
In granting relief, the Franklin Circuit Court ordered the severance of sections 1 and 2 of KRS 91A.400 and the word “authorized” in section 3 and directed the Governor’s Office of Local Government to include Hazard on the list of eligible cities as well as similarly situated cities. KRS 91A.400 as altered by the Circuit Court’s order would read:
(1) As used in this section, “authorized city” means a city on the registry maintained by the Department for Local Government under subsection (2) of this section.
(2) On or before January 1, 2015, the Department for Local Government shall create and maintain a registry of cities that, as of January 1, 2014, were classified as cities of the fourth or fifth class. The Department for Local Government shall make the information included on the registry available to the public by publishing it on its Web site.
(3) In addition to the three percent (3 percent) transient room tax authorized by KRS 91A.390(1)(b), the city legislative body in an authorized city may levy an additional restaurant tax not to exceed three percent (3 percent) of the retail sales by all restaurants doing business in the city….
The effect of the relief granted could be read to authorize any city in the Commonwealth to impose a restaurant tax. However, in response to the parties’ motions, the Court limited the scope of the relief to Hazard and deleted language severing portions of the statute.
Arguments against Hazard’s challenge
The Commonwealth appealed to the Court of Appeals. The Commonwealth has argued that Hazard lacks standing because only the General Assembly can grant the authority to levy taxes, and a court cannot provide the relief Hazard seeks. Alternatively, the Commonwealth contends that KRS 91A.400 is rationally related to legitimate state objectives, such as maintaining the status quo and preventing the expansion of taxation authority.
The Kentucky Restaurant Association (KRA) submitted an amicus brief in support of the Commonwealth. KRA argues that KRS 91A.400 reflects a proper exercise of legislative authority which limits to specific cities the power to impose a restaurant tax, and the General Assembly’s intent was to maintain this limitation. The General Assembly obviously did not intend to grant every city in Kentucky the authority to impose its own restaurant tax and thus rationale of the Circuit Court’s remedy violates the Kentucky Constitution’s separation of powers mandate by, among other things, extending the authority to impose restaurant taxes beyond legislative intent.
Potential implications of the Hazard case
A local restaurant tax of 3 percent of restaurant sales is basically a local sales tax that applies only to particular sales. Imagine if every city in the Commonwealth imposed its own local sales tax and administered it? Imagine the burden of having to try to figure out which cities have restaurant taxes and which do not. Imagine the burden of having to comply with hundreds of different restaurant tax filing schemes, some on paper, some electronic, with a complete lack of uniformity. The City’s ask goes against the clear national trend to require centralized and uniform administration of local taxes at the state-level.
Why is City of Hazard turning to the courts? The City of Hazard is not a taxpayer, a person or a business. The City is literally part of state government. And, the General Assembly is the gatekeeper for local taxing authority. Indeed, Kentucky’s restaurants and restaurant patrons surely count on the General Assembly to ensure that to the extent that local taxation of restaurants is authorized, that it is done in a way that takes into consideration the entire Commonwealth’s interests and goals.
Here, statutorily limiting the cities that are authorized to impose restaurant taxes to those qualified as of a certain date does not exclude Hazard (or any other city), it merely allows the limited number of cities that can impose such taxes to continue to do so.
“You know what I’m craving? A little perspective. That’s it. I’d like some fresh, clear, well-seasoned perspective. Can you suggest a good wine to go with that?” Anton Ego in Ratatouille (2007).
The Franklin Circuit Court’s decision that would include Hazard among the cities eligible to levy a restaurant tax under KRS 91A.400 may seem to address an immediate concern; however, it raises significant questions with broader implications. The system put in place by the General Assembly maintains a balance that prevents the unchecked expansion of taxation authority. Allowing a city like Hazard to levy a tax based on judicial rather than legislative action could set a precedent that undermines the General Assembly’s authority and disrupts the established framework for very limited local restaurant taxation, changes to which should be made through a deliberate and inclusive legislative process.
About the author: Mark A. Loyd, JD, CPA, is a partner of Dentons Bingham Greenebaum LLP in Louisville and chairs its Tax and Finance group. Loyd chairs the Society’s Editorial Board and serves on the KyCPA Board of Directors. He can be reached at mark.loyd@dentons.com.
