Kentucky Makes Further Changes to Sales Tax on Services

In recent years, Kentucky has broadened sales and use tax to cover more than 50 services. As one of the few states that has decided to impose sales tax on a number of services, it seems to still be working out the bugs, including better defining the taxable services themselves. Effective retroactively to Jan. 1, 2023, Kentucky clarified several definitions of these newly taxable services in HB 360, signed into law by Gov. Beshear earlier this year:

• Telemarketing: Expanded to include the use of text messages or social media to (1) promote products or services, take orders, or provide information or assistance regarding the products or services; or (2) solicit contributions.
• Lobbying: Defined to include the act of promoting or securing passage of legislation or an attempt to influence or sway a public official or other public servant to a desired action, including the support of or opposition to a project or the passage, amendment, defeat, approval or veto of any legislation, regulation, rule, or ordinance.
• Executive employee recruitment: Clarified to include services provided by a person to locate potential candidates to fill open senior-level management positions, including making a detailed list of client requirements, researching and identifying potential candidates, performing pre-screening interviews, and providing contract and salary negotiations.
• Residential and nonresidential security system monitoring: Revised to exclude separately stated onsite guard services.
• Renting space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events: Amended to provide an exemption if the sales tax is paid by the primary lessee to the lessor. The exemption applies to such rentals made on or after Feb. 25, 2022.
• Cosmetic surgery (specifically defined): Modified to narrow the sales tax exclusion to only those surgery services that are “medically necessary” to reconstruct or correct dysfunctional areas of the face or body due to birth disorders, trauma, burns, or disease. It appears that surgery services that are not “medically necessary” are taxable even if they are to correct dysfunctional areas of the face or body due to birth disorders, trauma, burns, or disease.
• Prewritten computer software access (specifically defined): Amended to exempt services sold to or purchased by a retailer that develops prewritten computer software for print technology and uses and sells prewritten computer software access services for print technology.
• Laboratory services: Clarified to specify that otherwise taxable laboratory services do not include services required by (1) a federal, state, or local statute; (2) a regulation; (3) a court order; or (4) another government-related rule.
• Sewer, water, and fuel services: Added an exemption from sales tax for sewer services “billed to a to an owner or operator of a multi-unit residential facility or mobile home and recreational vehicle park if the owner or operator declares that the sewer services, water and fuel are purchased for Kentucky residents for such residents’ use.”
• Extended warranty services: Expanded to include contracts to repair, replace, support, or maintain prewritten computer software access services.

In addition, Kentucky clarified the terms “use” and “storage” to include references to prewritten computer access services (i.e., SaaS, remote access software, cloud computing, or other similar product) as follows:

• “Use” does not include prewritten computer access services purchased for use outside of Kentucky and transferred electronically outside Kentucky for use solely outside Kentucky.
• “Storage” includes the keeping or retention in Kentucky of prewritten computer access services.

Also included in HB 360 is a new exemption for building materials, fixtures, or supplies purchased by a construction contractor if fulfilled by a construction contract for a sewer or water project with specified governmental agencies.

Finally, marketing services, as specifically defined, are no longer taxable.

KSM’s State & Local Tax Group follows legislative activity across the country. If you have questions about how these or other pieces of legislation might affect your business, please contact your KSM advisor or complete this form.