October 11, 1994
Subject: State Treasurer's Authority to Authorize Federal Tax Deposits.
Written by: Gerard Gerhard
Requested by: Hon. Frances Jones Mills, State Treasurer
Syllabus: In the limited circumstance where federal law preempts state law that would otherwise govern, the State Treasurer may authorize, without a completed "warrant" at the time the authorization is given, the financial agent of the U. S. Treasury to debit the bank account of the Commonwealth for the amount the Commonwealth owes in federal tax deposits.
OAGs cited: None.
Statutes construed: KRS 41.100; 41.120; 41.130; 44.010.
OPINION OF THE ATTORNEY GENERAL
The following question has been presented:
Can the State Treasurer, under the Kentucky statutes governing disbursements, authorize the U. S. Treasury, through its agents, to directly debit our bank account through [the] electronic TAXLINK system for the Income, Medicare and Social Security taxes being held on their behalf?
In our view, in the limited circumstance where state law that would otherwise govern is preempted by federal law, the State Treasurer may authorize, without the presence of a "warrant" at the time the authorization is given, the financial agent of the U. S. Treasury to debit the bank account of the Commonwealth for the amount the Commonwealth owes in Federal tax deposits, where such authority is given in conformity with a procedure for electronic funds transfer of federal tax deposits required by federal regulations. Discussion follows.
As pointed out, in substance, in your letter, certain federal regulations (Department of the Treasury Internal Revenue Service, 26 CFR Parts 1, 31, and 40, 59 Federal Register No. 131, 35414, copy enclosed), promulgated pursuant to section 523 of the North American Free Trade Agreement Implementation Act (P. L. 103-182), will require the Commonwealth to make its deposit of certain federal taxes (for example federal income tax withholdings, and Social Security taxes) via an electronic funds transfer procedure. The federal regulations impose certain deadlines regarding the deposits.
Because of the timing of accumulation of final payroll information, which affects determination of the specific amount of federal tax deposits due, and the deadlines imposed by the federal regulations, in some instances, payment, from the bank account of the Commonwealth to the U. S. treasury, will be required before a warrant for the payment can be completed. This circumstance arises, for example, when final payroll information is not available until after a "supplemental payroll" run is received in the afternoon (rather than the morning) of a pay day. Although the amount of the federal deposit due is known, the paper work related to the payment, in the form of a "warrant," cannot be completed in time to satisfy the deadlines imposed by the federal regulations.
Generally, under the laws of the Commonwealth, claims against the state may be paid by the State Treasurer only upon a "warrant" of the Finance and Administration Cabinet. See KRS 41.100; 41.120; 41.130; and 44.010.
Based upon the Supremacy Clause of the United States Constitution, Article VI, clause 2, federal law, which includes federal regulations, takes precedence over state law. See, for example, Capital Cities Cable, Inc., v. Crisp, 467 U.S. 691, 699, 104 S.Ct. 2694, 2700, 81 L.Ed.2d 580, 589 (1984), wherein the U. S. Supreme Court stated:
And, as we made clear in Fidelity Federal Savings & Loan Assn. v. De la Cuesta, 458 U.S. 141, 102 S.Ct. 3014, 73 L.Ed.2d 664 (1982):
'Federal regulations have no less preemptive effect than federal statutes.'
Given the express provisions of federal law, as embodied in the federal regulations noted, in our view Kentucky's Treasurer may select that method of payment of federal taxes owed that is authorized by the federal regulations, that the Treasurer deems to be in the best interest of Commonwealth. The State Treasurer may, in order to comply with the mandate of federal law, authorize payments to be made from Kentucky's Treasury to satisfy federal tax deposit requirements, with or without a warrant, and whether by debit or credit procedure.
The Treasurer, must, of course, ensure to the extent feasible in view of the role of the State Treasurer, that, in those instances where a warrant cannot be completed prior to a required federal payment, a warrant is completed as soon as feasible so as to achieve substantial compliance with state law.
Because of the mandatory role, under state law, of the Finance and Administration Cabinet in relation to authorization of payments from the state treasury via a warrant, we believe the State Treasurer must seek the concurrence of the Secretary of the Finance and Administration Cabinet regarding the method of payment selected, and the procedures to be followed, under the federal regulations here addressed.
Gerard R. Gerhard
Assistant Attorney General