Last Thursday, August 17, 2006, the Kentucky Supreme Court denied discretionary review of the Davis v. Department of Revenue case. We have had some inquiries concerning what effect this will have on the Kentucky treatment of interest income on Kentucky bonds. It will have no effect whatsoever. Interest income on bonds issued by the Commonwealth or any of its political subdivisions remain exempt from Kentucky income tax.
By refusing to hear the case, this case is now remanded to the Jefferson County Circuit Court to take action consistent with the Court of Appeals' opinion (No. 2004-CA-001940-MR). The Court of Appeals' decision rendered on January 6, 2006, in effect held that the Kentucky income tax statutes providing that Kentucky may tax the interest income from obligations of sister states is unconstitutional as violative of the United States Constitution's commerce clause. The only effect this decision may have on Kentucky bonds is that the interest income on Kentucky issued bonds will now be on an equal footing with the treatment of the interest income of bonds of other states, that is, it is not taxable. This removes the slight interest rate advantage that Kentucky issued bonds had over bonds from sister states in the market place.
If you are interested in reviewing the appellate court decision, please contact William L. Skees, Jr. at bskees@fbtlaw.com.
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