As we reflect on the recent Kentucky sales tax changes, we do not see significant impacts targeted at the energy-related industries. However, the sales tax points raised below should help all companies, including those in the energy industry.
Prior to July 1, Kentucky taxed five services, including hotel stays and telephone service. Effective July 1, 12 new services are taxable:
Labor associated with the repair, installation, and maintenance of taxable tangible personal property
- Extended warranties
- Landscaping and lawn care
- Janitorial
- Small animal veterinarian
- Industrial laundry
- Dry cleaning and laundry
- Linen supply
- Pet grooming and boarding
- Diet and weight-reducing
- Tanning
- Limousine, if a driver is provided
The primary questions arising from the extension of sales tax to these services have centered on installation and repair labor and what is called the pyramiding of the tax.
Electricians, HVAC contractors, plumbers, and others were among the most concerned taxpayers when the changes were initially announced. The Kentucky Department of Revenue quickly clarified that the extension of sales tax to installation and repair labor applied only to “tangible personal property,” and not improvements to real estate or fixtures in a building, which is the work done by contractors. For example, a heating and air conditioning unit becomes a permanent part of the residence, commercial, or industrial building in which it is installed. The HVAC unit is a fixture and therefore, neither installation nor repair of the unit is subject to sales tax.
The second issue relates to tax being charged on something on which tax has already been paid. An example occurs in the area of landscaping services. As the law is currently written, if a landscaper contracts with a tree removal service to remove a customer’s tree, the landscaper must pay sales tax to the tree removal company for removing the tree, and then, the customer also must pay the landscaper for the tree removal. Good tax policy dictates that the transaction between the tree removal service and the landscaper not be subject to tax and the tree removal only be taxed once when billed to the customer by the landscaper.
There has been talk that the General Assembly may pass a “fix” for this problem.
In addition to new services subject to tax, the General Assembly extended the types of admissions subject to sales tax. Previously, tickets for entrance to a display, program, sporting event, music concert, performance, play, show, movie, exhibit, fair, or other entertainment or amusement were taxable. Now, the sales tax is extended to include admission to campgrounds, bowling centers, skating rinks, swimming pools, tennis courts, golf courses and country clubs, and other events and activities.
The Department has established a website with questions and answers: www.taxanswers.ky.gov. Individuals and businesses can also submit their own questions through the website.
For more information, please contact your Dean Dorton advisor or Erica Horn at ehorn@deandorton.com.
