In a case pitting statutory language against a department of revenue’s historical practice, the Kentucky Court of Appeals held that the “franchise” of a public service corporation is a separate asset for ad valorem taxation purposes, and it is subject to state and local property taxation. Dayton Power & Light Co. v. Dep’t of Revenue, No. 2011-CA-001438-MR (Ky. Ct. App. Nov. 2, 2012).
From 1999 to 2003, the Kentucky Department of Revenue allowed Dayton Power and Light Company (DP&L), an electric utility, to pay tax on its intangible franchise value based on a “spread method,” which allocated the value among several classes of tangible property. The spread method had the effect of lowering the tax rate imposed on DP&L’s franchise and exempting it from local taxation. The Department reversed course in 2006 and took the position that the franchise should be taxed separately. The Department’s change in position increased the tax rate on DP&L’s franchise and subjected the franchise to local, as well as state, taxation.
The court rejected DP&L’s application of the doctrine of contemporaneous construction, which generally prevents an administrative agency from retreating from a long-standing policy regarding an ambiguous statute. The statutes at issue, the court found, were unambiguous, and DP&L did not present sufficient evidence that its prior agreement with the Department amounted to a long-standing policy of allowing utilities to employ the spread method with respect to their franchises. Instead, the court described the Department’s change in position as merely a correction of an “erroneous interpretation of the law.”