Kentucky Attorney General Coleman moves to block Hazard’s restaurant tax, calls it ‘unlawful’

Hazard, the Perry County seat, on March 26, 2024. (Photo by Austin Anthony)

The Eastern Kentucky city of Hazard is facing another legal obstacle in its effort to begin collecting a restaurant tax.

Attorney General Russell Coleman is appealing a Franklin Circuit Court order that said Hazard was eligible to  pursue the tax. He called it “an unlawful tax” for the city of about 5,200.

The restaurant tax, created by the state legislature in 1980, is levied in about 50 of Kentucky’s 418 cities on retail sales of food and beverages in all restaurants in the city. The tax rate is not to exceed 3% and revenue from it is to be used to promote tourism.

Hazard sued the state, claiming it was being discriminated against by not qualifying to enact the tax. Franklin Circuit Judge Phillip Shepherd last May ruled in favor of Hazard, opening the door for it and other communities to join the list of those imposing the tax. He ordered the Governor’s Office of Local Government to include on the list of cities eligible to impose the restaurant tax “all similarly situated cities” under the population of 8,000 like Hazard.

At the request of Hazard, Shepherd amended his order on Aug. 15 to say it applies only to the city of Hazard “and has no broader application (to other cities) because this suit is not a class action suit.”

The judge also deleted his previous requirement that the Governor’s Office of Local Government must include a list of other cities eligible to impose the restaurant tax.

Ed Jones, a Paducah attorney who is representing Hazard, said the city sought the amended order. “Ours was not a class action suit. We thought it should only apply to Hazard and the judge agreed with us. We talked to some cities about joining us earlier but they decided not.”

Other cities interested in imposing the restaurant tax now must start their own legal challenge if they want to pursue it, he said.

Morgain Patterson, director of municipal law for the Kentucky League of Cities, agreed.

She said the judge’s order last spring purported “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.”

“Now the judge has dropped from his initial order any other city besides Hazard from seeking eligibility for the tax,” she said late last week.

She said the judge’s initial and amended orders “preserved the right of cities that currently assess a restaurant tax to continue to do so.”

Shepherd’s amended order on Aug. 15 was good news for Hazard until Attorney General Coleman a few days later decided to appeal Shepherd’s ruling to the Kentucky Court of Appeals.

“We were ready to go with the tax but the attorney general’s appeal has stopped it for now. We hope this is only temporary and we can proceed with the tax,” said Hazard Mayor Donald “Happy” Mobelini. “I really don’t understand the reason for the appeal.”

Coleman said in a statement, “The Attorney General’s office will continue to defend the statute and oppose attempts to impose an unlawful tax.”

In his appeal filed Aug. 19, Coleman said allowing Hazard to implement a restaurant tax now is “a recipe for confusion given that this court (the Court of Appeals) might reverse the circuit court’s judgment.”

He said the appellate court should stay — or put on hold —  the circuit court’s judgment while the state’s appeal is continuing.

Neither Gov. Andy Beshear or the state Department for Local Government were parties in the lawsuit.  Both were dismissed by an agreement to follow any court order entered in the case, said department spokesman Logan Fogle.

In his ruling last spring, Shepherd took issue with parts of a state law — KRS 91A.400 — that say which cities may impose the tax.

Before 2015, Kentucky’s cities were divided into six classes based on their population at the time of classification. There were more than 400 classification-related laws on the books that affected issues like public safety, alcoholic beverage control and revenue options.

After Jan. 1, 2015, that classification of cities was changed, making Louisville and Lexington 1st-class cities and others home rule class.

The amended restaurant tax law allowed the state Department of. Local Government to maintain a list of “authorized cities” that as of Jan. 1, 2014, were classified as cities of the 4th- or 5th-class.

The law said in addition to a 3% transient room tax placed on lodging, the legislative body in an authorized city could levy a tax on tourism.

Shepherd said the restaurant tax law makes an unconstitutionally arbitrary distinction of cities eligible to enact the restaurant tax based on population and classification status on an arbitrarily chosen date, Jan. 1, 2014.

The judge added that the law “fails to provide a pathway to correct the misclassification of cities like Hazard, whose population has always met the statutory criteria for belonging in the 4th class (with the authority to enact the restaurant tax) rather than the 3rd class.”

But Shepherd declined to hold all of the law unconstitutional, especially in light of the financial reliance some cities have on the tax.

He noted that many tourism projects have been funded by cities authorized to levy the restaurant tax and that many bonds are financed using proceeds generated by the tax.

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