The Next Step for Cities Considering Franchise Fees for Telecommunications Companies
In June we notified members of the victory our cities experienced in the Kentucky CATV Association Inc. v. City of Florence et al. case. To recap, the Kentucky Supreme Court decided that cities can opt-in to the telecom tax scheme under KRS 136.660(1)(a-c) to continue receiving disbursements from the state pool OR the cities can exercise the power granted under the Kentucky Constitution to impose franchise fees on telecommunications companies.
Since we published the article explaining this case in June, KLC has been working with the Kentucky Department of Revenue to figure out how to move forward after this ruling. As you can imagine, there are many logistical issues including: When to opt-out? Who to notify if the city decides to opt-out? What factors should cities consider in deciding whether to opt-in or opt-out? What is the process for notifying companies? Is it final once a city decides?
The Kentucky Department of Revenue has developed a fact sheet with KLC’s assistance that is attached to this article. It explains some of the above questions and provides a lot of information. KLC recommends that each city take some time in deciding what the next steps are. While many cities were not receiving revenue to which they were entitled under the Constitution, some cities may benefit for remaining in the telecom tax scheme. Carefully calculating current receipts from the telecom tax scheme and balancing those against the potential receipts under a franchise fee as well as whether the funds would exceed the property tax and franchise fee components of its 2005 tax base, may take time and will require careful consideration.
If you have any questions regarding this or any other issues please contact Morgain Sprague at firstname.lastname@example.org
Local Jurisdictions Considering Implementation of Utility Franchise Fees
On June 15, 2017, the Kentucky Supreme Court (Kentucky CATV Association Inc. v. City of Florence, 520 S.W.3d 355, (Ky. 2017)) determined that the General Assembly did not have the power under Ky. Const. §181 to prohibit municipalities from collecting franchise fees from utilities in exchange for use of their rights-of-way, as that power was constitutionally granted to local municipalities pursuant to Ky. Const. §§ 163 and 164.
The telecom taxes imposed under KRS 136.604 and 136.616 were originally enacted as part of Tax Modernization in 2005 (HB 272). Effective January 1, 2006, the bill replaced the franchise value property tax and franchise fees on telecommunications companies with a 3% excise tax on multichannel video programming services and separate gross revenues tax rates on multichannel video programming services and communications services (2.4% and 1.3% respectively). With this legislation, existing local franchise fee collections were purportedly prohibited.
Because of this Supreme Court decision, some local jurisdictions are considering whether to renew or establish a franchise fee on cable service and/or communications service instead of relying on receipts from the state telecom taxes. Below are some key points cities and other jurisdictions should consider before activating any franchise payment provisions.
- Since 2006, cities, counties and other local jurisdictions throughout the Commonwealth have received monthly distributions of state telecom receipts electronically deposited into their bank accounts. The combined amounts for all jurisdictions annually totals $36.4 million.
- According to the provisions of KRS 136.660(4), any political subdivision that chooses to impose a franchise fee on any cable or communications service will forfeit distributions of all state telecom receipts (3% excise and 2.4% and 1.3% gross revenues taxes) during the time that any franchise fees are being collected. While each franchising jurisdiction should carefully evaluate its own unique situation, in many cases, the current distributions of state telecom taxes are and will continue to be greater than any revenues that might be generated from local franchise fees on cable services.
- Before a political subdivision begins a franchise fee imposition, it must notify the Department of Revenue in writing of the effective date of the franchise fee and that it is revoking its certified participation in the state telecom distribution fund. The Department requests a ninety-day notice before franchise fees begin.
- Cable companies and other utilities will need advance notification so they can perform any database changes needed to comply with new franchise fee requirements. Depending on the terms of the franchise, providers may also need time to communicate billing changes to the affected customer base. A ninety-day notice is a recommended minimum, but please consult with local providers to coordinate implementation details.
- Overall, cable receipts are in gradual decline statewide. In contrast, the annual state telecom distributions to local jurisdictions remains fixed at the statutorily set threshold of $36.4 million. While this amount does not fully cover the 2005 baseline, it will not decline under current law regardless of any further erosion of cable receipts.
- The repealed franchise value property tax component of cities’ historical tax base comprised, on average, at least 20% of their total collections amount. If a local jurisdiction elects to activate a franchise fee, the local jurisdiction would likely want to determine whether any new collections would exceed both the property tax and franchise fee components of its 2005 tax base to verify whether the decision to opt-out of participation with the state makes sound financial sense for the local jurisdiction.
If there are additional questions, please contact the Department of Revenue at 502-564-5170, option #2, or send an email to DOR.WEB.Response.Telecom@ky.gov.
On September 6, 2017, the U.S. District Court of Appeals for the Sixth Circuit issued a decision upholding legislative prayer in Bormuth v. County of Jackson, No. 15-1869. Some reading this may think, wait a second this case was decided this past February and changed our practices. This is true. However, the February 15, 2017 decision was issued by a three-judge panel. On February 27, 2017, the Sixth Circuit decided to rehear the case with all fifteen judges and vacated the previous decision. The underlying complaint alleged that the Jackson County Commission violated the Establishment Clause of the Constitution by asking persons to present to rise and assume a reverent position and a Commissioner offering a Christian prayer.
Bormuth argued that the courts should find the prayer in violation of the Establishment Clause in the Constitution because government officials were giving the prayer and the prayers were all Christian. It was his feeling that when a government official offers a public Christian prayer at a public meeting, it forces those present to worship Jesus Christ if they want to participate in government. He also believed that asking those present to rise and assume a reverent position was unduly coercive, forcing those present to submit to social pressure and worship a specified deity. The primary element of this case that differs from previously decided cases is that individual commissioners were offering the prayer, instead of guest preachers or outside individuals.
Most cases addressing whether government action has violated the Establishment Clause of the Constitution are subject to the Lemon test under which this case was first decided. Instead, the Sixth Circuit found that different standards apply to legislative prayer as the United States Supreme Court has found that legislative prayer “is deeply embedded in the history and tradition of this country.” Marsh v. Chambers, 463 U.S. 783 (1983). Instead, courts must focus on “whether the prayer practice fits within the tradition long followed in Congress and the state legislatures.” Town of Greece v. Galloway, 134 S.Ct. 1811, 1819 (2014). Each case overwhelmingly declines to analyze the content of the prayer refusing to subject prayer to a judicial determination of its sectarian nature. Instead the Town of Greece court stated that when the government invites prayer into the public arena it must allow the offeror to pray according to their beliefs.
What this means for our cities is that if our councils or commissions offer legislative prayer, there is no need to stress over the constitutionality. Instead, there are a few simple guidelines that may help. Is the prayer offered in a manner that allows the offeror to construct their own prayer? Is the council as a whole, mandating what religion or denomination must give the prayer? Is the prayer offered to focus the minds and hearts of the legislative members on their duties as public servants? Has any member of the legislative body commented that the prayer is offered with discriminatory intent? Is there any attempt to require all present to pray or any implication that if someone does not pray that they will not be taken seriously? These are some basic questions that can guide a local legislative body in constructing any prayer practice. As always, we recommend consulting with your city attorney in constructing this type of policy.
A link to the opinion can be found here:
If you have any questions please contact Morgain M. Sprague, KLC Managing Counsel for Member Legal Services at (859) 977-4212.
Standardized Occupational License Forms
On July 1, 2017, Kentucky finalizes the transition to a standardized occupational license tax forms for business reporting. Instead of trying to locate and select between different forms for over 200 taxing districts, businesses will now be able to use standardized forms to file with the local tax districts in which they owe taxes.
HB 277 of the 2012 Kentucky General Assembly established a process to phase in standardized forms for occupational license tax reporting. The legislation was a compromise between the business community and the local government associations to make filing easier for businesses while also ensuring that cities maintain taxing independence. The legislation was implemented in several phases, culminating in the requirement for local governments to accept approved standardized forms by July 1, 2017.
As the first step in implementing the legislation, the Secretary of State gathered all occupational license tax ordinances and forms from tax districts throughout the state. The ordinances and forms of each local taxing jurisdiction were placed on the Secretary of State’s website in November of 2012. Businesses have since been able to download these documents from the Secretary of State’s website, instead of having to contact various tax districts to access them. The Secretary of State maintains updated ordinances and forms as well as a spreadsheet of all occupational license tax rates by city and district. These rates are in a readily searchable format on the website, Microsoft Excel.
In the next phase, the Secretary of State worked with tax preparers and local tax administrators to create standard forms for tax districts that collect taxes for a single district. This single reporting form, complete with instructions, was codified in an administrative regulation in November 2016 and is available on the Secretary of State’s website at http://app.sos.ky.gov/occupationaltax/ as form OL-S Single Tax District, Occupation License Fee Return. And on March 3, 2017, the Dual Tax District Occupational License Fee Return was developed by the Secretary of State and codified in an administrative regulation, with instructions. It too is available on the Secretary of State’s website linked above. There are six districts effected by this change, which are Boyle County/Danville, Daviess County/Owensboro, Henderson County/City of Henderson, Jessamine County/Nicholasville, Rowan County/Morehead, and Taylor County/Campbellsville.
All tax districts that collect for either a single district or dual districts are required to accept the forms effective July 1, 2017.
For those tax districts that collect multi-district occupational taxes, the Secretary of State’s Office is working with stakeholders on the development of another form or forms. Until such a form or forms are adopted formally through the regulatory process, however, businesses reporting in these jurisdictions will likely want to continue using the multi-district return forms developed by local authorities in Boone, Kenton, Campbell, and Scott counties. KLC will make sure to update our members when there are additional developments on this work.
Municipal Road Aid Reminder
We are entering budget season and the KLC Legal Team would like to take this opportunity to remind our cities that they need to have a public hearing to get public input on road and bridge projects before spending municipal road aid funds. KRS 174.100(1). A lot of our cities have found that a good time to conduct this hearing is during the overall budget process.
Notice for the hearing must be given at least seven, and not more than twenty-one days before the hearing and before beginning work on any projects using road aid funds. KRS 174.100(1). At the hearing, any person may speak about any proposed project, any project that they wish to propose, project prioritization, and any other matter related to road or bridge projects in the city. KRS 174.100(2). The city is not bound by the testimony heard, but the city must give the testimony due consideration. KRS 174.100(3).
A single hearing encompassing the entire road and bridge program of the city meets the statutory requirement. Thus, your city might consider having this hearing as part of the overall budget process. KRS 174.100(5). In the alternative, it is also proper to have the public road aid fund hearings throughout the year as the need to expend the funds arise.
If you have any additional questions, please contact the KLC Legal Team at 800.876.4552.
ATTENTION CITY ATTORNEYS AND OFFICIALS:
The KLC Legal Team has compiled summaries of all of the Kentucky Attorney General Opinions, including Open Records and Open Meetings, for the first quarter of the year.
As always, we are striving to provide the most timely and helpful legal information for our cities.
Please see this link for the current summary.