Court of Appeals Issues Decision on Restaurant Tax Litigation

On Sept. 16, 2024, the Kentucky Office of the Attorney General (KYOAG) filed an appeal to the Kentucky Court of Appeals challenging the Franklin Circuit Court’s ruling on the constitutionality of KRS 91A.400, which allows authorized cities to impose a restaurant tax.

The Franklin Circuit Court previously granted summary judgment and declaratory relief in favor of the City of Hazard and Perry County finding KRS 91A.400 unconstitutional to the extent it excludes the City of Hazard from assessing and collecting a restaurant tax. The Order became final on Aug. 15, 2024, following technical corrections by the court. For additional background of the circuit court case, see our previous article, Nonfinal Decision Issued in the Restaurant Tax Litigation.

On Oct. 3, 2025, the Kentucky Court of Appeals reversed course and ruled that KRS 91A.400 is constitutional, even though the statute denies the City of Hazard the ability to impose a restaurant tax while allowing other cities to do so. You can find the non-final decision here.

Central to the court’s decision is Kentucky’s stringent separation of powers, enumerated in the constitution, which reserves to the Kentucky General Assembly exclusive authority to classify cities. Relying on this premise, the court found that the General Assembly had a rational basis for distinguishing among classes of cities when determining which may impose a restaurant tax. Furthermore, the court reviewed the General Assembly’s decision to allow historic fourth- and fifth-class cities to impose the restaurant tax when city classifications were eliminated and determined that “[i]t is rational to not choose to expand that taxation power to those who did not already have it.”

Pursuant to the Court of Appeals’ opinion, cities currently authorized to levy restaurant tax under KRS 91A.400 remain unaffected, and no new cities may impose the tax. The City of Hazard may seek further review by filing a motion for discretionary review with the Kentucky Supreme Court.

KLC will keep our members informed of new developments in this and any other cases that impact city governments.