Opinion
NO. 2016-CA-000687-MR
05-24-2019
RENT A CENTER EAST, INC. APPELLANT v. FINANCE AND ADMINISTRATION CABINET, DEPARTMENT OF REVENUE APPELLEE
BRIEFS FOR APPELLANT: Mark F. Sommer Jennifer Y. Barber Louisville, Kentucky BRIEF FOR APPELLEE: Stephen G. Dickerson Frankfort, Kentucky AMICUS BRIEF FOR KENTUCKY RENTAL DEALERS ASSOCIATION: Michael D. Kalinyak Lexington, Kentucky
NOT TO BE PUBLISHED APPEAL FROM JEFFERSON CIRCUIT COURT
HONORABLE OLU A. STEVENS, JUDGE
ACTION NO. 14-CI-001476 OPINION
AFFIRMING
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BEFORE: ACREE, DIXON AND NICKELL, JUDGES. ACREE, JUDGE: Rent A Center East, Inc. (RAC) appeals from an opinion and order of the Jefferson Circuit Court affirming the Kentucky Board of Tax Appeals (KBTA) order upholding the Kentucky Department of Revenue's tangible personal property tax assessment and penalty for the tax years 2002 through 2005. We affirm.
RAC owns and operates numerous retail stores that rent household items, including electronics, appliances, and furniture to consumers through rent-to-own agreements. RAC and the Department of Revenue entered into a settlement agreement for the tax years 1997 through 2001, which allowed RAC to utilize an alternative valuation method on their tax returns for its tangible personal property for those stated years. RAC continued to file its tax returns utilizing the alternative valuation method based upon the previous settlement agreement with the Department in subsequent years. The Department audited and assessed RAC additional cumulative taxes of $314,321.17, plus interest and an omitted property tax penalty for the tax years 2002 through 2005 in accordance with the valuation factors set forth in its personal property tax forms and instructions.
RAC protested the assessment and resulting penalty. RAC argued that its property was valued too high because the assessment did not appropriately consider the economic and functional obsolescence of its merchandise. The Department was not persuaded, and RAC appealed to the KBTA.
In its appeal to the KBTA, RAC again argued that the assessment overvalued its property based upon its unique rent-to-own characteristics. The KBTA held a hearing over two days. The KBTA determined RAC failed to meet its burden of proving the valuation of the property at issue was above fair cash value and directed a verdict for the Department. The KBTA further specifically found: (1) that the settlement agreement between RAC and the Department was not a "going forward" agreement, and therefore, it only covered the tax years 1997 through 2001; (2) the imposition of an omitted tax penalty was proper under KRS 132.360; and (3) the Department was not required to set forth its method for valuing tangible personal property in a regulation. RAC then sought judicial review in Jefferson Circuit Court.
Kentucky Revised Statutes. --------
RAC presented its previous arguments made to the Department and the KBTA to the circuit court. Additionally, RAC claimed that the tangible personal property at issue was household goods exempt from taxation. Alternatively, RAC claimed that the property should be classified as merchant's inventory, and therefore, subject to a lower tax rate. The Department countered that these two positions were not previously raised or litigated before the KBTA. The circuit court agreed and excluded those arguments from its review. The remaining arguments involved factual issues and the weight of evidence afforded by the KBTA; consequently, the circuit court affirmed the order of the KBTA. This appeal followed.
RAC first contends the Jefferson Circuit Court applied the wrong standard of review in affirming the decision of the KBTA. RAC argues that KRS 23A.010 provides that the circuit court's review of an administrative agency's decision is not an appeal, but an original action. As an original action, RAC asserts that the circuit court may conduct a hearing, supplement the record, and accordingly, issue its own findings of fact and conclusions of law. Furthermore, RAC argues that because its circuit court appeal is an original action, properly preserving its arguments made to the Board before pleading to the circuit court is inconsequential to judicial review of the matter. This argument is without merit.
RAC's argument is based on Louisville Metro Health Dep't v. Highview Manor Ass'n, LLC, 319 S.W.3d 380, 383 (Ky. 2010). However, that case is inapplicable here. Louisville Metro dealt with the scope of the district court's review of a local code enforcement board. The Court held that because district courts have no appellate jurisdiction, it must conduct a de novo trial regarding final orders of the board. Id. at 384.
Administrative actions such as this invoke the circuit court's authority to act as a court of review. "The position of the circuit court in administrative matters is one of review, not of reinterpretation." Kentucky Bd. of Nursing v. Ward, 890 S.W.2d 641, 642 (Ky. App. 1994) (quoting Commonwealth, Department of Education v. Commonwealth, Kentucky Unemployment Insurance Commission, 798 S.W.2d 464, 467 (Ky. App. 1990)). Judicial review of a KBTA decision is governed by KRS Chapter 13B. Louisville Edible Oil Products, Inc. v. Revenue Cabinet Com. of Kentucky, 957 S.W.2d 272, 273 (Ky. App. 1997). The standard of review appears in KRS 13B.150(2) as follows:
The court shall not substitute its judgment for that of the agency as to the weight of the evidence on questions of fact. The court may affirm the final order or it may reverse the final order, in whole or in part, and remand the case for further proceedings if it finds the agency's final order is:Id. KRS 13B.150(2) makes clear that in reviewing the decision of an administrative agency, a reviewing court does not perform a de novo review except as to pure legal issues. The circuit court, acting as an appellate court, is not free to consider new or additional evidence. Kentucky Bd. of Nursing v. Ward, 890 S.W.2d 641, 642 (Ky. App. 1994). "It is the function of [appellate courts] to ensure that the decision of an administrative agency is supported by substantial evidence. We are not permitted to retry the case or to review the evidence de novo." Commonwealth of Kentucky Cabinet for Human Res. v. Bridewell, 62 S.W.3d 370, 373 (Ky. 2001) (citing Kentucky State Racing Comm'n v. Fuller, 481 S.W.2d 298 (Ky. 1972)). Accordingly, the Jefferson Circuit Court's review of this administrative matter was conducted in accordance with the appropriate standard of review.
(a) In violation of constitutional or statutory provisions;
(b) In excess of the statutory authority of the agency;
(c) Without support of substantial evidence on the whole record;
(d) Arbitrary, capricious, or characterized by abuse of discretion;
(e) Based on an ex parte communication which substantially prejudiced the rights of any party and likely affected the outcome of the hearing;
(f) Prejudiced by a failure of the person conducting a proceeding to be disqualified pursuant to KRS 13B.040(2); or
(g) Deficient as otherwise provided by law.
With these same standards in mind, our review of an administrative action is generally focused on the question of arbitrariness. Kaelin v. City of Louisville, 643 S.W.2d 590-91 (Ky. 1982). The exercise of arbitrary power occurs whenever an agency acts outside the scope of its authority, fails to afford procedural due process, or makes a decision which is not supported by substantial evidence. Commonwealth, Transportation Cabinet v. Cornell, 796 S.W.2d 591, 594 (Ky. App. 1990).
RAC maintains that it properly preserved and tried its argument, without objection, before the KBTA, stating that its property consists of household goods which are exempt from taxation. We disagree.
The Department's ruling letter identified the issue as "whether the [alternative valuation method] utilized by RAC accurately reflects the fair cash value of its rental assets for the years in question." (R. 26).
In its petition to the KBTA, RAC identified the issue as "the fair cash value of the involved tangible personal property owned by Rent A Center for tax years 2002-2005" in its argument that an alternative valuation method was appropriate for property unique to the rent-to-own industry. (R. 183).
In its decision, the KBTA recognized three issues before it to resolve: (1) whether the 1997 through 2001 settlement agreement between RAC and the Department was a "going forward" agreement and whether the Department should have been required to value RAC's property in subsequent years according to the agreement; (2) whether the imposition of an omitted property tax penalty is appropriate for property that was undervalued rather than missing from the return; and (3) whether the Department should have promulgated a separate regulation which sets forth its classification system for the valuation of the tangible property. (R. 208-9). The KBTA's decision further noted that RAC asked for resolution of the proper way to value rent-to-own property for future tax purposes, but because of the limited evidentiary record before it, the Board was unable to make that determination.
It was not until RAC's petition for judicial review in the circuit court that the household goods exemption was explicitly pleaded. The petition provided:
"At Protest [of the Department's assessments], Rent-A-Center maintained, inter alia, that the alternative method of valuation it advanced through Savage, Savage, & Brown, Inc., its independent third[-]party property tax consultants, is warranted based upon functional and economic obsolescence unique to and associated with the involved rent-to-own household goods."(R. 4, 6).
...
Regardless of the proposed alternative valuation for the involved rent-to-own property, it is also Rent-A-Center's position that all such property is exempt from Kentucky ad valorem tax pursuant to Section 170 of the Kentucky Constitution, as administered by the Department, as "personal household goods used in the home."
Additionally, RAC's brief to the Jefferson Circuit Court identified the issue as "whether [RAC]'s property is exempt from taxation as household goods under Section 170 of the Kentucky Constitution, and if not, what the fair cash value of [RAC]'s property is for tangible personal property tax purposes." (R. 92).
From our review of the record, RAC failed to raise this issue during the administrative process. "Failure to raise an issue before an administrative body precludes a litigant from asserting that issue in an action for judicial review of an agency's action." Personnel Bd. v. Heck, 725 S.W.2d 13, 17 (Ky. App. 1986) (citation omitted). Our review is constrained by the fact that the record before this Court does not contain the video recordings of the hearings or any record evidence presented to the KBTA, despite the fact both sides cite to the hearings and the KBTA record, not only on the preservation issue, but also throughout their briefs. RAC also asserts in its brief that the KBTA failed to rule on the household goods exemption argument despite acknowledging at the hearing that it was explicitly pleaded by RAC in writing as well as during the hearings.
"It is the Appellant's duty to ensure that the record on appeal is sufficient to enable the court to pass on the alleged errors." Smith v. Smith, 450 S.W.3d 729, 731 (Ky. App. 2014) (internal quotation marks and citation omitted). The form submitted by RAC for certification of the record on appeal references only one CD/DVD and 333 pages of filings made in the circuit court. The CD/DVD recording is a two-minute long recording of the circuit court denying RAC's motion for default judgment. Because the KBTA record was not included in the request for certification, it was not made a part of the appellate record, and we are unable to review it. "It has long been held that, when the complete record is not before the appellate court, that court must assume that the omitted record supports the decision of the trial court." Commonwealth v. Thompson, 697 S.W.2d 143, 145 (Ky. 1985).
Furthermore, we briefly mention that if the household goods exemption was truly the central issue to be resolved, it would have been initially advanced to and addressed by the Department when RAC protested the assessment, and consequently, addressed by the KBTA in its decision. Because the question whether the property in dispute is household goods exempt from taxation was not properly pleaded or preserved, we are unable to consider this issue now.
The limited record additionally impedes any meaningful review of RAC's remaining arguments, but we will address them as thoroughly as the record allows.
RAC next argues that the Department's assessment of the involved rent-to-own property is incorrect because the depreciation applied does not consider abnormal wear and tear unique to rent-to-own goods. RAC maintains that an alternative valuation method is appropriate based upon economic and functional obsolescence of its goods. The Department's assessment provided:
The Department's valuation method of tangible personal property encompasses an 150% declining balance in the computation of the conversion factors. The conversion factors are intended to account for the different impairments, including economic or functional obsolescence. The Department recognizes that merchandise owned by the rental industry receives additional wear and tear due to the nature of its use. Therefore, allowances have been made to classify rental assets in a shorter class life than their owned counterparts. For example, a couch used in most industries is classified as Class III property; however, a couch owned by a company in the rental industry is afforded Class II treatment.(R. 26). Despite this reasoning, RAC maintained that its property was valued too high.
The Board determined that RAC failed to present material evidence supporting its position that its property should be valued less than what the Department assessed. A tax assessment is presumed valid, and the burden of establishing that the assessment was incorrect is on the taxpayer. Revenue Cabinet, Commonwealth of Ky. v. Gillig, 957 S.W.2d 206, 210 (Ky. 1997). Additionally, while a tax assessor is required to consider actual characteristics of the property, it is not required to "consider every conceivable characteristic that might affect the value of the property or determine what the fair market value actually is for the property." Id. at 211 (discussing Dolan v. Land, 667 S.W.2d 684, 687 (Ky. 1984)). "Property shall be assessed for taxation at its fair cash value, estimated at the price it would bring at a fair voluntary sale[.]" KRS 132.190(3).
The Board was simply unpersuaded by RAC's explanation for an alternative valuation method. The decision of the Board stated that RAC did not present any testimony or supporting analysis demonstrating that the goods were overvalued by the Department. Specifically, the Board pointed out that RAC did not present any expert witnesses, such as a certified appraiser, who could testify as to the value of the rent-to-own property. Also, while RAC provided tax returns for the years in question, it did so without any explanation from the preparers of the returns. As a result, the returns only demonstrated that an alternative valuation method was used, not the underlying reasoning. According to the Board, RAC's corporate representative testified only that he believed the property was valued too high, but admitted that he could not offer any specific valuation information. The KBTA concluded this information did not overcome the Department's explanation as to how this specific type of property was valued for tax purposes in accordance with its forms and instructions. We are not permitted to substitute our judgment for that of the agency as to the weight of the evidence. KRS 13B.150(2). Accordingly, we cannot say the Board was arbitrary in its decision that RAC did not overcome its burden to prove the property was overvalued.
RAC further contends that the exclusion of its expert witness was reversible error. However, as the KBTA unequivocally explained in its decision, RAC did not name its expert witness until after the discovery deadline closed. The discovery deadline was September 20, 2013, sixty days prior to the hearing. RAC did not name John Chilton, Certified Public Accountant, as a potential expert witness until October 7, 2013, when it filed a supplemental answer to the Department's first set of interrogatories. Pursuant to 802 KAR 1:010 Section 4(3), "If a party fails to comply with an order regarding discovery, the commission or hearing officer may order that the: . . . (b) Noncomplying party shall be prohibited from introducing related documents or testimony at the hearing[.]" Moreover, according to its order, the KBTA's February 18, 2013 prehearing order required that all responses to discovery requests be filed sixty days before the hearing. RAC made a proffer of Mr. Chilton's qualifications and testimony to the KBTA's hearing officer without the KBTA present. The KBTA acted in accordance with the hearing procedures; therefore, we find no error in the exclusion of Mr. Chilton's testimony.
Next, RAC argues that its household goods should be taxed using the Merchant's Inventory rates. This argument, too, was not preserved. Therefore, for the same reasons previously stated regarding the household goods exemption arguments, we will not discuss it.
Lastly, RAC asserts no additional tax is due, and therefore, no penalties can be assessed. Alternatively, RAC maintains the Department wrongfully assessed an omitted property tax penalty for property that was included on its return, but undervalued.
The Board determined that the omitted property tax penalty was in accordance with KRS 132.360. The statute provides:
(1) Any assessment of tangible personal property listed with the property valuation administrator or with the Department of Revenue as provided by KRS 132.220 may be reopened by the Department of Revenue within five (5) years after the due date of the return, unless the assessed value has been established by a court of competent jurisdiction. If upon reopening the assessment the department finds that the assessment was less than the fair cash value and should be increased, it shall give notice thereof to the taxpayer, who may within forty-five
(45) days thereafter protest to the department and offer evidence to show that no increase should be made. After the department has disposed of the protest, the taxpayer may appeal from any such additional assessment as provided by KRS 49.220 and 131.110.KRS 132.360 (emphasis added). The statute speaks for itself. In this circumstance, the additional tax and resulting penalty are handled as an omitted tax bill and penalty.
(2) Upon such assessment becoming final, the department shall certify the amount due to the taxpayer. The tax bill shall be handled and collected as an omitted tax bill, and the additional tax shall be subject to the same penalties and interest as the tax on omitted property voluntarily listed.
RAC further asserts that it sought advice from tax advisors and relied upon the prior settlement agreement with the Department in preparing its 2002 through 2005 returns employing the alternative valuation method to its property. However, as the Board determined, the settlement agreement applied only to the tax years listed within it, 1997 through 2001. This ruling is unchallenged on appeal, and therefore, is final. Additionally, stated reliance on tax advisors does not constitute reasonable cause to waive an assessed penalty. 103 KAR 1:040 requires taxpayers to provide specific supporting documentation necessary to substantiate reasonable cause to constitute waiver of a penalty. The record contains a letter from the Department to RAC's tax preparers which plainly states in regard to RAC's 2002 return, "the Revenue Cabinet's processing of the [2002] returns as filed does not constitute acceptance of Rent A Center's alternative valuation methodology. Tax year 2002 and all future tax years are subject to audit verification." (R. 262). Documentation in support of waiver of tax penalties is absent from the record. Consequently, the Board rightfully concluded the omitted tax penalty was appropriate under the circumstances and RAC was not entitled to a waiver of the penalty imposed.
For the foregoing reasons, the opinion and order of the Jefferson Circuit Court affirming the KBTA's order is affirmed.
ALL CONCUR. BRIEFS FOR APPELLANT: Mark F. Sommer
Jennifer Y. Barber
Louisville, Kentucky BRIEF FOR APPELLEE: Stephen G. Dickerson
Frankfort, Kentucky AMICUS BRIEF FOR KENTUCKY
RENTAL DEALERS
ASSOCIATION: Michael D. Kalinyak
Lexington, Kentucky