KY Legislature

Article 01.11.2023 Dean Dorton

With legislation enacted in 2022, the Kentucky General Assembly imposed sales tax on over thirty services not previously subject to tax and made other changes that will increase costs for businesses and individuals alike. You can find a list of the specific services and most changes here. In exchange the legislature lowered Kentucky’s individual income tax rate to 4.5% for 2023, and the House of Representatives has lowered it again to 4.0% for 2024.

The Department of Revenue (“DOR”) has been working steadily to issue guidance on numerous issues raised by the 2022 changes. That guidance is being posted to a DOR website called “Tax Answers.” Through the site, taxpayers can access two newsletters (June and September Sales Tax Facts) and FAQs on several of the newly taxable services to help them navigate the changes.

Some of the common questions we’ve been asked are listed below. As you read through the answers please keep in mind that specific facts and circumstances can change the taxability of transactions and we encourage you to reach out to your Dean Dorton advisor or other professional advisor if you have further concerns.

Article 05.25.2022 Dean Dorton

Recently signed into law by Kentucky Governor Andy Beshear, House Bill 499 establishes a statewide Employee Child Care Assistance Partnership to help working families afford the high cost of child care.

Expected to begin in July 2023, the partnership provides state funds to match employer-provided child care benefits. So if an employer contributes $400 a month toward their employee’s child care expenses, the state will contribute up to $400 of additional reimbursement, provided that program requirements have been met.

With annual child care costs in Kentucky totaling as much as $11,000 for a single infant, many parents are forced to choose between their kids and their careers. More than 50,000 respondents in a recent survey cited child care as a key reason for leaving the state workforce.

House Bill 499 addresses this situation in two ways: by substantially increasing the child care assistance going to parents each month and by creating an incentive for employers to offer (or increase) a childcare benefit. More money for child care will also, with time, help to improve and expand daycare offerings throughout the state.

Passed with broad public support and near unanimous legislator approval, this legislation is a big deal for working families. But it’s also important for their employers – especially at nonprofits.

How Child Care Costs Hurt the Nonprofit Workforce

Research suggests that nonprofit employees earn as much as 8% less than people in similar roles at for-profit companies. The reasons why are debatable. The result, however, is that child care costs put extra economic pressure on the nonprofit workforce. Many people leave nonprofits rather than see their wages consumed by daycare bills. Talented people avoid nonprofit jobs for the same reason.

Child care costs have become such an urgent issue for mission-driven organizations that the National Council of Nonprofits wrote a letter to the Senate encouraging federal action to cut costs. In that letter, they raise the alarm about widespread labor shortages and hiring challenges throughout nonprofits, citing the two leading causes as salary competition and child care.

What Congress will do remains to be seen. In Kentucky, however, the passage of House Bill 499 gives nonprofits the power to address both those issues at once – and retain or recruit great talent in the process.

Offering Relief to Nonprofit Workers

The economic realities at nonprofits make it difficult (or impossible) to substantially raise salaries and retain the amazing contributions of young working parents. By offering child care assistance rather than raises, nonprofits can address a major source of stress for their employees while potentially doubling the monetary impact of the benefit. It’s a clear win for everyone at nonprofits.

The nonprofit team at Dean Dorton has been closely monitoring the changing relief opportunities available to nonprofit organizations in these volatile times. We are here to provide consultation, collaboration, or confirmation as needed in your journey.

Article 05.18.2022 Dean Dorton

In its 2022 Regular Session, the General Assembly enacted two taxes aimed at newer components of the country’s economy – peer-to-peer car sharing and electric or hybrid motor vehicles. In addition, the state’s transient room tax, which typically applies to hotels, is extended.

The Newbies

An excise tax on peer-to-peer car sharing and power used to charge electric batteries plus registration fees on electric and hybrid vehicles are among the new products and services subject to tax.

Peer-to-peer car sharing

Beginning January 1, 2023, a six percent (6%) excise tax will be imposed on peer-to-peer car sharing, which is “the authorized use of a motor vehicle by an individual other than the vehicle’s owner through a peer-to-peer car sharing program.” The leasing of a motor vehicle is expressly excluded from the “peer-to peer” definition. “Peer-to-peer car sharing” is akin to renting a motor vehicle from a rental company except in this case, the rental company is an individual. Peer-to-peer car sharing is to motor vehicle rentals what Airbnb is to hotels.

Electric and hybrid vehicles and power used to charge electric batteries

Next, the Legislature ventured into the land of electric and hybrid vehicles. “Electric vehicle” or “electric motorcycle” means a vehicle or motorcycle that has plug-in charging capabilities, regardless of whether the vehicle has an electric motor only or a combination of an internal combustion engine and electric power. A “hybrid vehicle” is one that does not have plug-in charging capability, but is powered by a combination of an internal combustion engine and an electric motor.

Effective January 1, 2024, upon initial registration and then annually, the county clerk will collect a registration fee of $120.00 from owners of electric vehicles and $60.00 from owners of electric motorcycles or hybrid vehicles. The rate may be increased or decreased on an annual basis if there is an increase in the National Highway Construction Cost Index 2.0. However, the fees cannot be lower than the initial fees set by the new statute. The proceeds from the registrations will be split fifty-fifty between the general fund and road fund.

Finally, the General Assembly created an excise tax, with an initial base rate of three cents ($0.03) per kilowatt hour, to be adjusted annually, on “electric vehicle power” distributed in the state by an “electric vehicle power dealer.” “Electric vehicle power” means “electrical energy distributed into the battery or other energy storage device of an electric vehicle to be used to power the vehicle,” and “electric vehicle power dealer” is a person who owns or leases electric vehicle charging stations. If a charging station is located on state property, a surtax with an initial base rate of three cents ($0.03) per kilowatt hour is imposed.

Expand the base!

Speaking of Airbnb, included in the many tax changes is expansion of the scope of the state’s transient room taxes to include arrangements such as Airbnb, plus cabins, campsites, and other lodging. Cities, counties, and tourism districts also are authorized to extend their transient room taxes to include Airbnb, cabins, etc. This expansion is effective January 1, 2023.

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Article 05.18.2022 Dean Dorton

Kentucky’s last tax amnesty program took place about a decade ago, in 2012, and there was an amnesty program in 2002, also. More than 23,000 taxpayers participated in the 2002 program and the state netted about $40 million in new money after program expenses. The 2012 program was met with even greater enthusiasm. There were approximately 28,000 applicants and the net amount of tax collected was $53.4 million.

If the Department of Revenue is able to retain a service provider to run the program, Kentucky’s next tax amnesty program will be from October 1, 2022 through November 29, 2022. The program applies to tax liabilities for tax periods ending or transactions occurring on or after October 1, 2011 and prior to December 1, 2021. All taxes, penalties, fees, and interest administered by the Department of Revenue, except property taxes, are covered by the program. If there is no one to run the program in 2022, the Department is to administer the program in 2023. If taxpayers fail to participate and are later audited, increased penalties and interest will apply to any tax owed.

Stay tuned for more details.

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Article 05.18.2022 Dean Dorton

Did you say 35 new services will be subject to sales and use tax? Yes. Additionally, an exemption from sales tax was expanded, a de minimis threshold was enacted for the new services, and there is a new reporting requirement for organizers of festivals.

Expand the base, expand the base, expand the base!

Numerous tax reform commissions and paid tax consultants have advised the General Assembly for decades to “modernize” Kentucky’s sales tax statutes by “expanding the tax base.” “Expanding the base” can be done in different ways, such as by repealing exemptions from sales and use tax or by imposing tax on products or services not subject to tax. The Legislature started down the path of expanding the base in 2018 by adding ten services to the tax base and increasing the types of admissions subject to tax.

Effective January 1, 2023, 35 more services will be subject to sales and use tax. Here’s the list:

Photography and photo finishing services
Marketing services
Telemarketing services
Public opinion and research polling services
Lobbying services
Executive employee recruitment services
Web site design and development services
Web site hosting services
Facsimile transmission services
Private mailroom services, including presorting mail and packages by postal code; address barcoding; tracking; delivery to postal service; and private mailbox rentals
Bodyguard services
Residential and nonresidential security system monitoring services
Private investigation services
Process server services
Repossession of tangible personal property services
Personal background check services
Parking services, including valet services and the use of parking lots and parking structures, but excluding any parking services at an educational institution
Road and travel services provided by automobile clubs
Condominium time-share exchange services
Rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events
Social event planning and coordination services
Leisure, recreational, and athletic instructional services
Recreational camp tuition and fees
Personal fitness training services
Massage services, except when medically necessary
Cosmetic surgery services
Body modification services including tattooing, piercing, scarification, branding, tongue splitting, transdermal and subdermal implants, ear pointing, teeth pointing, and any other modifications that are not necessary for medical or dental health
Testing services, except testing for medical, educational, or veterinary reasons
Interior decorating and design services
Household moving services
Specialized design services including the design of clothing, costumes, fashion, furs, jewelry, shoes, textiles, and lighting
Lapidary services, including cutting, polishing, and engraving precious stones
Labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold in that transaction including service calls and trip charges
Labor to repair or alter apparel, footwear, watches, or jewelry when no tangible personal property is sold in that transaction
Prewritten computer software access services

While examples of the types of things to be taxed is included as part of the language of a few of the services, such as body modification and specialized design services, only five of the 35 are defined:

Cosmetic surgery services
- Modifications to all areas of the head, neck, and body to enhance appearance through surgical and medical techniques, excluding reconstruction of facial and body defects due to birth disorders, trauma, burns, or disease;
Photography and photo finishing services
- (1) The taking, developing, or printing of an original photograph, or (2) Image editing including shadow removal, tone adjustments, vertical and horizontal alignment and cropping, composite image creation, formatting, watermarking printing, and delivery of an original photograph in the form of tangible personal property, digital property, or other media, excluding photography services necessary for medical or dental health;
Marketing services
- Developing marketing objectives and policies, sales forecasting, new product developing and pricing, licensing, and franchise planning;
Telemarketing services
- Services provided via telephone, facsimile, electronic mail, or other modes of communications to another person, which are unsolicited by that person, for the purposes of: (a)(1) promoting products or services; (2) taking orders; or (3) providing information or assistance regarding the products or services; or (b) soliciting contributions; and

Prewritten computer software access services
- The right of access to prewritten computer software where the object of the transaction is to use the prewritten computer software while possession of the prewritten computer software is maintained by the seller or a third party, wherever located, regardless of whether the charge for the access or use is on a per use, per user, per license, subscription, or some other basis.

The Department of Revenue is working to develop guidance for taxpayers as to the meaning and breadth of many of the new services. Two other changes were made to expand the reach of sales and use taxes.

Broaden the definition of “extended warranties”

First, the definition of “extended warranties” is amended to impose tax on extended warranties on real property. The phrase “extended warranties” is a bit of a misnomer. The phrase includes an agreement such as an extended warranty on your car, but it also includes what are commonly referred to as maintenance or service contracts. Thus, maintenance or service contracts for real property, such as parking lot cleaning, exterior maintenance of apartment buildings, and heating and air conditioning maintenance, will be subject to sales tax. (Snow removal is already taxable as a “landscaping” service.)

Limit the exemption for residential utilities

Second, the exemption from sales tax on residential utilities, such as sewer services, water, electricity, and natural gas, will be limited to services “purchased and declared by the resident as used in his or her place of domicile.” “Place of domicile” is defined as “the place where an individual has his or her legal, true, fixed, and permanent home and principal establishment, and to which, whenever the individual is absent, the individual has the intention of returning.” Many questions are popping up around this change, including: How does a resident “declare” their place of domicile? Will there be a form? Will there be a different form for every type of utility – water, gas, electric, etc.? What if you own rental property and you pay the utilities? The rental property is not your place of domicile, but it is someone’s place of domicile.

Add exemptions?

What is the opposite of “expanding the base?” The tax base is narrowed or constricted when existing exemptions are broadened or new exemptions are added. The General Assembly significantly expanded the current exemption for prescription drugs, which has applied only to drugs to treat humans. Effective January 1, 2023, both prescription and over the counter drugs used in the farming and treatment of cattle, sheep, goats, swine, poultry, ratite birds, llamas, alpacas, buffalo, aquatic organisms, or cervids also will be exempt from sales and use tax. (Note that the exemption does not extend to horses.)

Two other exemptions added by the General Assembly are specifically related to the new services subject to sales and use tax. The first provides that the provision of services related to lump sum, fixed-price, or similar contracts executed on or before February 25, 2022 are to be exempt from the additional taxable services imposed. (February 25, 2022 is the date on which House Bill 8 was introduced in the General Assembly.) That date now having passed, any businesses entering multi-year fixed price or lump sum contracts need to factor in the additional taxable services when quoting or bidding on jobs.

Second, there is a partial exemption for the newly taxed services if the gross receipts from the provision of the services were less than $6,000 during calendar year 2021. However, once gross receipts exceed $6,000 in 2022 or a subsequent year, all additional receipts are subject to tax. If a business that will provide one of the new taxable services has no doubt but that it will exceed the $6,000 de minimis threshold, we recommend collecting the tax beginning on January 1, 2023 on all receipts to eliminate the administrative burdens associated with keeping track of when $6,000 is reached and rushed actions to register for sales tax and revised accounting and other activities the day after the $6,000 is met.

Miscellaneous

The final sales tax change of note is aimed at increasing compliance in the state by vendors at events. Beginning July 14, 2022, coordinators of festivals or similar events must provide the Department of Revenue a list of vendors selling at the event. While a precise definition of “festivals or similar events” has not yet been provided, it is possible the reporting requirement could apply to everything from a city or county’s annual spring, summer, or fall festival to large events such as The Kentucky Derby and The Breeder’s Cup.

Article 05.18.2022 Dean Dorton

Among the changes that the Kentucky General Assembly made are a few affecting individual and corporation income taxes. The change with the impact on the largest number of people is the potential reduction of the individual income tax rate from five percent (5%) to four and one-half percent (4.5%). Future rate reductions are also a possibility.

Potential rate reductions for individual income taxes

Currently, many states are flush with monies from various COVID-19 relief programs. Kentucky is no exception. Thus, many state legislatures have enacted various tax rebates or exemptions to benefit taxpayers. For example, Georgia residents are receiving a one-time $250 income tax rebate, and Floridians will have the opportunity on certain dates to buy numerous items, such fuel, diapers, disaster supplies, and tools free from sales tax. While both of these approaches were discussed by the Governor and General Assembly, the statute ultimately enacted is aimed at reducing, and eventually eliminating, Kentucky’s individual income tax.

Section 1 of House Bill 8 provides for a tax rate reduction of one-half of one percent (0.5%) if certain “reduction conditions” are met. Those reduction conditions include having a certain balance in the state’s budget reserve trust fund, or rainy-day account, as of the end of the state’s fiscal year, which is June 30, and for the fiscal year, receipts deposited in the state’s General Fund must be equal to or in excess of expenditures from the Fund.

The Department of Revenue, with assistance from the Office of State Budget Director, is charged with reviewing the reduction conditions and determining whether the conditions are satisfied. If a tax rate reduction is to occur, it will be implemented for the taxable year beginning on January 1, 2023. If the reduction conditions are not met, the rate will remain at its current five percent (5%). The Department is to continue reviewing the reduction conditions on an annual basis, but no further rate reduction will take place without future action by the General Assembly.

Conformity with the Internal Revenue Code

Another change updates Kentucky’s income tax statutes to be consistent with the Internal Revenue Code (“IRC”) as of December 31, 2021. Previously, Kentucky followed the IRC in effect as of December 31, 2018. The effective date of the change is for tax years beginning on or after January 1, 2022. No change was made, however, to the modifications to the IRC that Kentucky has had in effect for decades – most notably, the differences related to calculation of depreciation and allowances for bonus depreciation or Section 179 expense.

One new income tax credit and higher limits for another

In an effort to motivate individuals and businesses to invest in decontamination or remediation of property, the General Assembly created a refundable income tax credit for “qualifying decontamination property.” The credit is available for calendar years 2022 through 2031. The amount of the credit depends on the total qualifying expenditures made by the taxpayer for the decontamination or remediation of the property. The total credit that may be awarded for a single qualifying decontamination property cannot exceed $30,000,000.

Also, home and business rehab professionals may enjoy the increased credit for qualified rehabilitation expenses. The statutory amendment increases the allowable maximum credit from $60,000 to $120,000 on residential property and from $400,000 to $10,000,000 on non-residential properties.

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