Dawson v. Kentucky Distilleries & Warehouse Co.

Background

Two distillery and warehouse companies — one based in Ohio and another in New Jersey — sued after Kentucky passed a law charging fifty cents per gallon on whisky when it was withdrawn from bonded storage or transferred out of the State. Much of the whisky in Kentucky warehouses was owned by people and companies from other States, and warehouse operators refused transfers unless the tax was paid. The companies asked federal courts to stop the State from enforcing the tax, and the federal trial courts issued injunctions against collection.

Reasoning

The Court asked whether the levy was really a tax on doing business or instead a tax on the whisky itself. Looking at how it worked, the Court found it taxed each lot of whisky when the owner exercised the right to remove or transfer it, rather than taxing the warehouse business. Because it functioned like a property tax, it failed the State Constitution’s rules for property taxation and was invalid. The Court also agreed that the plaintiffs could get federal equitable relief because, when they sued, state-law remedies for recovering an improper payment were uncertain. The Court denied the State’s argument that pending state litigation required stopping the federal suits.

Real world impact

The decision prevents Kentucky from collecting the fifty-cent per gallon charge as written and protects owners, including out-of-state holders, from that tax on withdrawal or transfer. Warehouse operators are not required to serve as the ultimate taxpayers. The ruling also confirms that federal courts may enjoin state tax enforcement when legal remedies at the time are unclear or inadequate.