Nonfinal Decision Issued in Restaurant Tax Litigation

On Jan. 24, 2023, the Perry County Fiscal Court and the City of Hazard initiated a lawsuit in Franklin Circuit Court asserting that KRS 91A.400 is unconstitutional because it arbitrarily authorizes some cities to impose a restaurant tax based upon historical classes and leaves similarly situated cities without the ability to impose the tax. As a remedy, the parties requested that the court amend the statute to allow all cities to assess the restaurant tax or, in the alternative, find the statute unconstitutional in totality.

The cities of Bardstown, Beaver Dam, Berea, Elizabethtown, Kuttawa, Madisonville, Morehead, Pikeville, and Prestonsburg intervened in the lawsuit as former fourth- and fifth-class cities eligible to assess the restaurant tax. These cities argued that the restaurant tax statute is constitutional and that invalidating it would cause catastrophic economic harm to those cities that impose the tax.

The Kentucky Office of Attorney General also intervened in the lawsuit to defend the constitutionality of the restaurant tax as a proper exercise of legislative discretion by the Kentucky General Assembly.

All parties filed motions for summary judgment that requested the court to issue a final decision, which were argued on Dec. 7, 2023.

Judge Phillip Shepherd issued an order granting summary judgment and declaratory and injunctive relief on May 14, 2024. This order is not final and should not serve as a basis for a city to adopt a new restaurant tax. The order clearly preserves the right of cities that currently assess a restaurant tax to continue to do so. However, the order purports to expand the number of cities that can assess the restaurant tax on a prospective basis, but the language of the ruling is unclear as to which cities that may include, except that it specifies the City of Hazard is eligible.

The parties have 10 days from the date of the order to file motions to alter, amend, or vacate. If this motion is filed, that extends the deadline for a party to appeal the decision. Once the court rules on that motion, the parties have 30 days to file an appeal.

KLC will keep our members informed of new developments in this and any other cases that impact city governments. We reiterate that no city should take immediate action under this nonfinal order.