Kentucky Supreme Court Validates Franchise Fees in Telecommunications Tax Case

Yesterday, the Kentucky Supreme Court issued an opinion in the case of Kentucky CATV Association Inc. v. City of Florence et al. finding Kentucky’s telecommunications tax, to the extent that it prohibits cities from charging franchise fees to telecommunications companies for using city rights of ways, is unconstitutional as applied to the cities.

In 2011, the Kentucky League of Cities joined the cities of Florence, Greensburg, Mayfield and Winchester to file a lawsuit in Franklin Circuit Court challenging the constitutionality of the 2005 Multichannel Video Programming and Communications Services Tax (the Telecom Tax). As enacted, this statute prohibits cities from exercising the constitutional power to charge franchise fees on telecommunications companies for the privilege of using city rights of ways.

At issue is the method of replacing the city franchise fees on cable and telephone companies with a uniform tax system. While the law did provide the cities with some tax revenue, it fell far short of what the cities had collected in franchise fees prior to the enactment of the law. Ultimately, the difference resulted in cities being short-changed by approximately $7.5 million per year in annual revenue. Cities attempted for years to recoup that amount by seeking a legislative change. After years of being unsuccessful, the lawsuit was filed.

Aside from the significantly diminished revenue, this case became monumentally important to cities because the argument turned on the question of whether the Kentucky Constitution empowers the cities to collect franchise fees. Despite the clear language in the Kentucky Constitution to the contrary, the Franklin Circuit Court found that it did not and upheld the constitutionality of the telecom tax. Concerned that this ruling could extinguish a substantial source of revenue for cities, the Kentucky League of Cities and the cities appealed.

The Kentucky Court of Appeals reversed the Franklin Circuit Court decision giving the cities a significant legal victory. In its opinion, the appellate court recognized the intent of the Constitutional delegation was to give local governments authority to collect franchise fees in the Kentucky Constitution. The court found the “telecommunications tax has effectively frustrated the ability of local governments to collect franchise taxes, which this Court believes can only be accomplished through constitutional amendment.”

In early 2016 the Kentucky Supreme Court agreed to hear this case.  Agreeing with the Kentucky Court of Appeals, the opinion states that “the Court… finds it abundantly clear that the framers of our Constitution intended that municipalities shall have both the power to grant franchises as well as the power to collect fees in exchange for granting those franchises.” Click here to read the entire opinion. The Court declined to invalidate the telecom tax in its entirety, instead limiting its decision to invalidate KRS 136.660(1)(a)-(c) as it is applied to cities. Other political subdivisions remain under the scheme of the telecom tax as well. For cities, the Court left open the option for cities to collect franchise fees or elect to participate in the tax scheme.

KLC is considers this an extraordinary legal victory for our cities. This opinion is not final for 21-days and the opposing side has the option of requesting a rehearing. KLC will provide more information about the practical implications of the decision in the upcoming weeks. If you have any questions, please contact J.D. Chaney or Morgain Sprague at 1-800-876-4552 or jchaney@klc.org or msprague@klc.org.