Motion — Budget Rent-A-Car of Cincinnati, Inc. v. Kentucky Revenue Cabinet

—

Supreme Court, U.S,

(@) | I. PILED

No. 85-1637 | MAY @ 1988

SPANIOL, JR.

CLERK

SUPREME COURT OF THE UNITED STATES

October Term, 1985

BUDGET RENT A CAR OF CINCINNATI,

oes «6s « «« »« - Appellant

versus

REVENUE CABINET, COMMONWEALTH

OF KENTUCKY : - - - - Appeilee

MOTION TO DISMISS OR AFFIRM

On Appeal From the Supreme Court of Kentucky

ROSS T. CARTER

Legal Services Section

Revenue Cabinet

P. 0. Box 423

Frankfort, Kentucky 40602

Ph: 502/564-3112

Counsel for Appeilee

WESTERFIELD-BONTE CO., 619 W. KENTUCKY=-P.O. SOX 3251, LOUISVILLE, KY.

No. 85-1637

SUPREME COURT OF THE UNITED STATES

October Term, 1985

Bupcet Rent A Car OF Crncinnatl, Inc. - Appellant

Vv.

REVENUE CABINET, COMMONWEALTH OF

KENTUCKY - - - - - - Appellee

ON APPEAL FROM THE SUPREME COURT OF KENTUCKY

MOTION TO DISMISS OR AFFIRM

The appellee moves the Court to dismiss the appeal

herein or, in the alternative, to affirm the judgment of

the Supreme Court of Kentucky on the ground that it

is manifest that the questions on which the decision of

this cause depends are so unsubstantial as not to need

further argument.

I. THE STATE LAWS INVOLVED AND THE

NATURE OF THE CASE.

The Greater Cincinnati Airport is located in

Northern Kentucky. Budget Rent A Car of Cincinnati

maintains an outlet there, renting automobiles to cus-

tomers who frequently drive across the Ohio River into

Cincinnati. Some of the cars which Budget rents were

licensed in Kentucky, and some were licensed in Ohio.

The question of where the vehicles should have been

2

registered is not an issue in this case. The questions

raised by Budget were: may Budget rent its Ohio-

licensed vehicles from its Kentucky outlet without

paying tax to Kentucky?; and, is tax due on every

Kentucky transaction even though some of the vehicles

are driven some of the time in Ohio?

The first question was decided purely under state

law. Kentucky imposes a usage tax for the privilege

of using Kentucky lighways. The Supreme Court of

Kentucky looked at the applicable statutes and regu-

lations (Ky. Rev. St. 138.460, 138.463, 138.455, and 103

Ky. Admin. Reg. 44:020) and determined that Ken-

tucky motor vehicle usage tax was due on every trans-

action that tock piace in Kentucky, irrespective of

whether the vehicle bore Ohio or Kentucky licertse

plates. This question, since it involves only state law,

is presumably not before this Court for consideration.

Il. THE FEDERAL QUESTION INVOLVED.

The second question was decided by the Kentucky

Supreme Court under the commerce clause of the fed-

eral constitution. The Court applied the classic four-

part test set out in Complete Auto Transit, Ine. v.

Brady, 430 U. 8. 274, 97 S. Ct. 1076, 51 L. Ed. 2d 326

(1977), and concluded that taxation of all of Budget’s

Kentucky operations imposed no unconstitutional

burden on interstate commerce.

Other constitutional arguments, such as a denial of

equal protection, were not raised by Budget and have

never been discussed in the proceedings below.

Ill. A BRIEF SUMMARY OF THE KENTUCKY

SUPREME COURT'S DECISION.

A. The State Law Issue.

In Kentucky, vehicle rental agencies may select

between two methods of paying motor vehicle usage

tax. They may pay either five percent of the value of

the vehicle at the time it is registered in Kentucky, or

they may pay five percent of the gross rental charges

derived from renting the vehicle in Kentucky. Budget

argued that since registration in Kentucky is a pre-

requisite to the first alternative, it must also be a pre-

requisite to the second alternative. The Supreme

Court of Kentucky ruled to the contrary. The Court

simply stated that if the second alternative is elected,

then usage tax is due on all rentals executed within

Kentucky, regardless of where the vehicle may have

been registered. To hold otherwise would permit

Budget to escape tax completely simply by purchasing

Ohio license plates for all the vehicles located at the

Kentucky outlet. In fact, there was some evidence in

the record to indicate that this had indeed occurred.

B. The Federal Constitutional Issue.

The basic tenor of the constitutional argument

below was that since interstate commerce is implicated

(by virtue of the fact that some customers drive rental

vehicles from Kentucky into Ohio and back) then the

entire transaction, or a large proportion of the total

transactions, must be exempt from taxation. In apply-

ing the Brady, supra, test the Kentucky Supreme Court

+

reached these conclusions: the Kentucky motor ve-

hicle usage tax does not discriminate against interstate

commerce ; maintaining a business outlet for the rental

of vehicles in Kentucky supplies sufficient nexus to

impose the tax; it is not necessary that the tax be ap-

portioned on the basis of mileage, under the authority

of Capitol Greyhound Lines v. Brice, 339 U. 8. 542,

70 S. Ct. 806, 94 L. Ed. 1052 (1950); and the tax is

fairiy related to the services provided by the state, viz.,

the privilege of using Kentucky highways.

IV. ARGUMENT.

A. The Case Presents No Substantial Question Not

Previously Decided by This Court.

Complete Auto Transit, supra, supplies the defini-

tive test for determining whether Kentucky’s tax is

valid under the commerce clause. The appellant does

not propose that Complete Auto Transit ought to be

extended, discarded, or substantially modified. Rather

Budget seems to argue either that Complete Auto

Transit should not be applied at all (see Appellant’s

jurisdictional statement, pp. 14-15) or that the Ken-

tucky Supreme Court mishandled the apportionment

prong of the Complete Auto Transit test. (See Ap-

pellant’s jurisdictional statement, pp. 15-16).

First, it should be clear that Complete Auto Transit

applies to highway tax cases. The case itself, after all,

dealt with a tax levied on a motor carrier. Subsequent

cases discussing Complete Auto Transit have indicated

that it applies to all types of interstate commerce, in-

cluding use of highways. See Massachusetts v. United

5

States, 435 U. S. 444, 55 L. Ed. 2d 403, 98 S. Ct. 1153

(1978). .

Second, this Court has ruled that a state may ignore

mileage completely in evaluating the apportionment

prong of the Complete Auto Transit test. In Capitol

Greyhound Lines v. Brice, supra, the Court stated:

‘“Compiete fairness would require that a state tax

formula vary with every factor affecting appropriate

compensation for road use. [...] We have recognized

that such burdens may be sufficient to justify states in

ignoring even such a key factor as mileage... .’’ 339

U. S. at 546-547, 94 L. Ed. 2d 1053, 70 S. Ct. 806.

Complete Auto Transit and Capitol Greyhound

Lines specifically hold that the fact that a taxpayer

may travel extensively on out-of-state highways does

not invalidate a tax or reduce a tax on his in-state

travels. This case illuminates the precise reason for

that rule. Paying the Kentucky tax entitles Budget

and Budget’s customers to use every highway in Ken-

tucky. As it happens they choose to use our highways

very little; but they are free, just like every other

Kentucky taxpayer, to use every mile of Kentucky’s

highways. Their privilege is the same as everyone

else’s; therefore their tax obligation should be the

same, too.

B. Budget Attempts to Raise Issues Which Were Not

Raised Before and for Which It Lacks Standing.

Budget elected to be taxed under the second alter-

native. Budget now argues that the first alternative is

invalid. Budget paints a picture of ravenous tax col-

lectors stationed at the state’s borders extracting an

onerous tax from every non-resident who desires to

drive into our state. That scenario might be appro-

priate if Budget were one of those hypothetical non-

residents who was stopped and foreed to pay the tax.

But those are not the facts of this case. The pertinent

fact here is that Budget rents automobiles in Kentucky

to people who sometimes drive into Ohio, and doesn’t

want to pay tax to either state. Budget should not be

permitted to avoid its own tax obligation by arguing

that another tax, assessed against another taxpayer,

might be unconstitutional.

V. CONCLUSION.

For the reasons stated herein this appeal should

either be dismissed or affirmed.

Respectfully submitted,

Ross T. CARTER

Legal Services Section

Kevenue Cabinet

P. O. Box 423

Frankfort, Kentucky 40602

Ph: 502/564-3112

Counsel for Appellee

CERTIFICATE OF SERVICE

I hereby certify that three copies of the foregoing Mo-

tion to Dismiss or Affirm were served this __-___ day of

May, 1986, in compliance with the Rules of the Supreme

Court of the United States, by depositing three copies in a

United States post office or mailbox, with first-class

postage prepaid, addressed to Hon. Robert S. Miller, Miller,

Griffin & Marks, P.S.C., Suite 700, Security Trust Build-

ing, Lexington, Kentucky 40507-1293. All parties required

to be served have been served.

Ross T. Carter

Attorney for Appellee

APPENDIX

RENDERED: JANUARY 16, 1986

TO BE PUBLISHED

SUPREME COURT OF KENTUCKY

No. 84-80-991-DG

REVENUE CaBINET, COMMONWEALTH

or Kentucky - - - - - - Movant

Vv.

Bupcet Rent-A-Car or Cincinnati,

Iwo. - + += = & «© © + Respondent

On Review From the Court of Appeals

No. 84-CA-707-MR

(Franklin Circuit Court No. 82-CI-1017)

OPINION OF THE COURT BY JUSTICE GANT

REVERSING AND REMANDING

Budget Rent-A-Car of Cincinnati, Inc., among its opera-

tions, maintains an automobile rental outlet at Greater

Cincinnati Airport, which is located in Boone County, Ken-

tucky. Rentals at that site comprise some 60% of the total

business of the corporation. Pursuant to the applicable

statutes and regulations of this state, an allocation formula

was devised and agreed to by which Budget registered

some 19% of the vehicles used at this location in Kentucky,

the remainder being registered in Ohio. This action con-

cerns the usage tax payable to the Commonwealth under

the applicable law of the state.

10

The statute pertaining to the question is:

KRS 138.463. Collection of tax on U-Drive-It. —

(1) A holder of a certificate as required under KRS

281.615 to operaic as a U-Drive-It as defined in KRS

281.014 may pay the usage tax as provided in KRS 138.

460 or, subject to the provisions of subsection (2), may

pay a usage tax of five per cent (5%) levied upon the

amount of the gross rental or lease charges paid by a

customer or lessee renting or leasing a motor vehicle

from such holder of the certificate.

(2) A holder of a certificate shall pay the usage

tax as provided in KRS 138.460 unless he shows to the

satisfaction of the Cabinet that he is regularly engaged

in the renting or leasing of motor vehicles to retail

customers as part of an established business. Persons

first engaging in the renting or leasing of motor ve-

hicles to retail customers shall, in addition to obtaining

a certificate required under KRS 281.615, demonstrate

to the satisfaction of the Cabinet that they are pre-

pared to qualify under the standards set forth in this

subsection.

(3) In the event the holder of such certificate quali-

fies under subsection (2) and elects to pay the usage

tax by the alternate method as provided in subsection

(1), he shall present his certificate to the county clerk

at the time the motor vehicle is offered for registration

in Kentucky and the following provisions shall be ap-

plicable.

(4) The tax shall be the direct obligation of the

holder of the certificate but it may be charged to and

collected from the customer in addition to the rental

or lease charges. The tax due shall be remitted to the

Revenue Cabinet.

11

The applicable regulation in this case is 103 KAR 44:

020(6) (b) : "

Fleets of vehicles operating under a U-Drive-It per-

mit which are registered pursuant to an allocation

formula by the Department of Transportation may,

upon approval of the Department of Revenue, elect to

pay the five per cent (5%) usage tax on revenue de-

rived from rental or leasing of all vehicles rented or

leased in Kentucky.

Under KRS 138.463(1), Budget chose to operate under

this second option, which provides a usage tax of 5% upon

“gross rental or lease charges paid by a customer or

lessee,” rather than paying the usage tax on the vehicles

registered in Kentucky. However, they paid this optional

tax only on the rental or lease charges on those vehicles

registered in Kentucky, and not on the rental or lease

charges for the entire fleet of U-Drive-Its rented at the

Kentucky location. Relying upon the above quoted regu-

lation and statute, and after a complete audit of Budget,

Revenue assessed a deficiency of $255,526, plus penalties

and interest, contending the regulation and the statute

clearly required under the option selected by Budget that

the 5% usage tax applied to all Kentucky rentals, not

merely to rentals of those vehicles registered in the state.

The audit conducted by Revenue on the records of

Budget disclosed that Budget had collected the 5% usage

tax on all vehicles in the rental fleet, irrespective of its

registration, applying the tax to the “time and mileage”

charge and the collision insurance charge, but not to other

charges such as the “drop-off” charge in the rental con-

tracts. However, Budget had paid the tax thus collected

on only the vehicles registered in Kentucky, pocketing the

remainder.

12

The Board of Tax Appeals upheld the deficiency assess-

ment, plus penalty and interest, but its Opinion and Order,

written by Edward F. Prichard, Jr., Chairman, was re-

versed by the Franklin Circuit Court and that reversal was

upheld by the Court of Appeals.

STATUTORY CONSTRUCTION

KRS 138.463 provides two alternate methods of paying

taxes for U-Drive-It businesses operating in Kentucky.

They may pay the usage tax of 5% provided under KRS

138.460 on the value of registered vehicles at the time of

registration; or, they may pay a usage tax of 5% on the

“gross rental or lease charges paid by a customer or lessee

renting cr leasing a motor vehicle...” There is no lan-

guage of limitation if the company elects to pay its tax

under the second alternative and yet the interpretation

urged upon us and adopted by Budget (and by the Court

of Appeals) would add to the second alternative, after the

words “motor vehicle,” the phrase “Registered in Ken-

tucky.” We cannot concur with such equivocation, and find

no connection in the statute between the two alternatives

which would make the first alternative an incidence of the

second. Cf. Furste v. Dixie Traction Company, 286 Ky. 336,

150 S. W. 2d 913 (1941).

The alternative methods are quite simple. Once the

allocation formula is determined, as provided by 103 KAR

44 :020, the U-Drive-It operator may pay the usage tax pro

vided by KRS 138.460 at the time of registration, on all

vehicles registered in Kentucky, and exclude those vehicles

registered in another state; or they may elect to pay the

5% usage tax derived from leases entered into in this state

on all vehicles in the rental fleet which are leased in Ken-

tucky.

To hold otherwise would permit Budget to select the

best of both alternatives. For example, the record divulges

13

that there was annually a vast difference between the per-

ceutage of vehicles registened in Kentucky and the per-

centage of rental of those vehicles when compared to the

entire fleet rental. Also, for two periods, one of four

months and one of five months, no tax was paid at all in-

asmuch as no Kentucky vehicle was rented out of the entire

fleet. Clearly, the statute was not intended to permit

Budget, or similar enterprises, to do business in this state

on a regular basis without paying a fair and proper tax

for that privilege. Cf. Reeves v. Deisenroth, 288 Ky. 724,

157 S. W. 2d 331 (1941). Further, KRS 138.455 states that

all taxes imposed under the applicable sections of the chap-

ter are taxes “on the privilege of using a motor vehicle

upon the public highways” of this state. Under our Con-

stitution, the revenues from such taxes are mandated to

be placed in the road fund.

CONSTITUTIONALITY

The principal thrust of Budget’s argument herein is

that the regulatory scheme enacted by Revenue under the

statute and under the applicable regulations are violative

of the United States Constitution, art. 1, § 8, CL. 3, the in-

terstate commerce clause. Budget’s contention was adopted

by the Franklin Cireuit Court and the Court of Appeals,

but we do not agree. Although the law relating to the

commerce clause has undergone cyclical changes over the

past 50 years, one phrase has been repeatedly echoed in the

hails of the Supreme Court of the United States. That

phrase is: “It is not the purpose of the commerce clause

to relieve those engaged in interstate commerce from their

just share of state tax burden even though it increases the

cost of doing business.” Western Live Stock v. Bureau of

Revenue, 303 U. 8. 250, 254, 58 S. Ct. 546, 548, 82 L. Ed.

823 (1938).

14

The criteria which are to be applied to any state tax

relating to interstate commerce, by whatever name such

tax may be levied, were set out in Complete Auto Transit,

Inc. v. Brady, 430 U. S. 274, 97 S. Ct. 1076, 51 L. Ed. 2d

326 (1977). Those are: (1) Tkere shall not be discrimina-

tion between foreign and state corporations; (2) There

must be local activities within the taxing state to form

sufficient nexus to justify the tax; (3) The tax must be

properly apportioned to local activities; and (4) The tax

must be related fairly to services provided by the state.

Also, this case goes on to say, such tax would be upheld

even though the activity was generated exclusively by in-

terstate sales.

Applying these criteria to the case before us, we find

distinct compliance with each of them. First, there is no

discrimination between this Ohio corporation and any Ken-

tucky corporation operating in the same line of business.

In fact, no discrimination is even urged by the respondent.

Second, the entire activities of Budget in renting its fleet

at its airport location in Kentucky are intrastate, not in-

terstate, giving more than sufficient connection, or nexus,

to this state in the operation. The fact that the customer,

or lessee, may go north, south, east or west from his point

of Kentucky origin is his choice, not that of Budget. Also,

in whichever direction he goes, he operates upon the high-

ways of this state for some portion of the trip. This is a

total answer to the third standard. The apportionment by

mileage urged by Budget is noi required under the com-

merce clause, especially where there is this volume of local

activities. See Capitol Greyhound Lines v. Brice, 339 U.S.

542, 70 S. Ct. 806, 94 L. Ed. 1053 (1950). Finally, the tax

is on the privilege to use the highways in this state, not on

the use itself. Although Budget may charge by the mile

driven, the tax is a flat percentage charge for the privilege.

15

Of course, as Budget readily admits, there is no question

of double taxation herein as Ohio charges no registration

tax or usage tax on any of the Ohio licensed vehicles in

the fleet.

STATUTORY APPLICATION

We further affirm the Board of Tax Appeals in its

opinion that the tax applies to all charges, including “total

time and mileage,” “full collision insurance,” “personal ac-

cident insurance,” and “drop-off charges,” as set out in the

lease agreement with Budget as lessor and the customer

as lessee. We find no ambiguity in a statute which assesses

the usage tax upon “gross rental” and “gross .. . lease

charges.” As any dictionary definition reads, “gross”

means “without deductions.” If it is a charge contained

in the lease, by clear meaning that is a “lease charge.”

We reverse the Court of Appeals on the issues herein

disposed of and remand this case to the Franklin Circuit

Court for further proceedings dealing with penalty assess-

ment, statute of limitations, and all other issues originally

raised but not disposed of in that court.

All coneur.

Attorney for Movant:

ROSS T. CARTER

Legal Services Section

Revenue Cabinet

P. O. Box 423

Frankfort, KY 40602

Attorney for Respondent:

ROBERT S. MILLER

Miller, Griffin & Marks, P.S.C.

700 Security Trust Building

Lexington, KY 40507