Attorney General Russell Coleman has appealed a Franklin County Court ruling that Hazard was entitled to collect the tax, calling it an “unlawful tax” on the city of about 5,200 residents.

The restaurant tax, introduced by the state legislature in 1980, is levied in approximately 50 of Kentucky’s 418 cities on retail sales of food and beverages in all city restaurants. The tax rate cannot exceed 3% and the revenue is intended to be used to promote tourism.

Hazard sued the state, claiming he was being discriminated against because he was not authorized to collect the tax. Franklin Circuit Court Judge Phillip Shepherd ruled in Hazard’s favor last May, opening the door for Hazard and other municipalities to join the list of tax collectors. He ordered the Governor’s Office of Local Government to add “all similarly situated towns” with fewer than 8,000 residents to Hazard to the list of towns authorized to collect the restaurant tax.

At Hazard’s request, Shepherd amended his order on August 15 to state that it applied only to the city of Hazard “and has no broader application (to other cities) because this action is not a class action.”

The judge also struck down his previous requirement that the Governor’s Office of Local Government provide a list of other cities eligible to collect the restaurant tax.

Ed Jones, a Paducah attorney representing Hazard, said the city sought the amended order. “Our lawsuit was not a class action lawsuit. We thought it should only apply to Hazard, and the judge agreed with us. We talked to some cities about joining us earlier, but they decided not to.”

Other cities interested in introducing the restaurant tax would now have to take legal action themselves if they wanted to pursue that goal, he said.

Morgain Patterson, director of municipal law for the Kentucky League of Cities, agreed.

She said the judge’s order last spring was ostensibly intended to “expand the number of cities that can prospectively collect the restaurant tax. However, the language of the ruling is not clear as to which cities those are, other than specifically stating that the city of Hazard is eligible.”

“Now the judge has reversed his original order that no other city other than Hazard could apply for the tax,” she said late last week.

She said the judge’s original and amended orders “preserved the right of cities that currently impose a restaurant tax to continue to do so.”

Shepherd’s amended order on August 15 was good news for Hazard until Attorney General Coleman decided a few days later to appeal Shepherd’s decision to the Kentucky Court of Appeals.

“We were ready to implement the tax, but the Attorney General’s appeal has stopped it for now. We hope this is only temporary and we can move forward with the tax,” said Hazard Mayor Donald “Happy” Mobelini. “I really don’t understand the reason for the appeal.”

Coleman said in a statement: “The Attorney General’s Office will continue to defend the law and oppose attempts to impose an unlawful tax.”

In his Aug. 19 appeal, Coleman said allowing Hazard to impose a restaurant tax now would be “a recipe for confusion, as this court (the appellate court) could overturn the district court’s ruling.”

He said the appeals court should stay or put on hold the district court’s ruling while the state’s appeal proceeds.

Neither Gov. Andy Beshear nor the state Department of Local Government were involved in the proceedings. Both were dismissed with an agreement to comply with any court orders issued in the case, department spokesman Logan Fogle said.

In his ruling last spring, Shepherd challenged parts of a state law – KRS 91A.400 – that determines which cities can levy the tax.

Prior to 2015, Kentucky’s cities were divided into six classes based on their population at the time of classification. There were more than 400 classification-related laws covering issues such as public safety, alcohol control and revenue opportunities.

After January 1, 2015, this classification of cities was changed and Louisville and Lexington became first-class cities and the others became home-rule cities.

The amended Restaurant Tax Law allowed the state Department of Local Government to maintain a list of “authorized cities” classified as fourth- or fifth-class cities as of January 1, 2014.

The law states that the legislative body of an authorized city may impose a tourism tax in addition to a three percent lodging tax.

Shepherd said the restaurant tax law makes an unconstitutional arbitrary distinction between cities eligible to collect the restaurant tax based on population and classification status on an arbitrarily chosen date, January 1, 2014.

The judge added that the law “provides no means of correcting the misclassification of cities like Hazard, whose populations have always met the legal criteria to be in the fourth class (with the authority to impose the restaurant tax) rather than the third class.”

Shepherd, however, declined to declare the entire law unconstitutional, especially given some cities’ financial dependence on the tax.

He pointed out that many tourism projects have been financed by cities that are authorized to collect the restaurant tax and that many bonds are financed with revenue from the tax.