Tax Reform Tops Kentucky’s Legislative Priority List

As has been the case in many states this year, Kentucky’s 2022 legislative session was historic. From changes to unemployment insurance to welfare reform, lawmakers clearly prioritized the state’s budget. But with tax reform at the top of the priority list, it’s the business community that needs to pay closest attention.

House Bill 8 – a tax reform package that includes a plan to phase out individual income tax, increase taxes on certain services, and eliminate sales tax exemptions for a wide range of industries – was originally vetoed by Gov. Andy Beshear. The Kentucky General Assembly then voted to override Beshear’s veto, citing the bill’s potential to encourage economic growth. The following are key facets of the bill that may impact businesses.

Individual Income Tax Phase-Out

Kentucky’s personal income tax rate of 5% could be reduced if certain revenue thresholds are met. If the Kentucky Department of Revenue certifies that the thresholds have been met by Sept. 5, 2022, the personal income tax rate will be reduced to 4.5% for tax years beginning on or after Jan. 1, 2023. The department will annually review the reduction thresholds to see if the tax rate should be further reduced; however, no reductions will be effective without the express action of the Kentucky legislature.

Nonresident withholding is calculated based on the maximum personal income tax rate so any rate reduction would automatically reduce the amount of nonresident withholding due by a pass-through entity on nonresident owners.

Imposition of Sales and Use Tax on New Services

Currently, Kentucky imposes sales and use tax on 17 specifically enumerated services. Effective Jan. 1, 2023, an additional 35 services will become taxable, including:

• Photography and photo finishing (specifically defined)
• Marketing (specifically defined)
• Telemarketing (specifically defined)
• Public opinion and research polling
• Lobbying
• Executive employee recruitment
• Website design and development
• Website hosting
• Facsimile transmission
• Private mailbox rentals and private mailroom services, including presorting mail and packages by postal code, address barcoding, mail tracking, and delivery
• Bodyguarding
• Residential and nonresidential security system monitoring
• Private investigation
• Process serving
• Repossession of tangible personal property
• Personal background checking
• Parking, including valet services and the use of parking lots and parking structures (except for parking services at an educational institution)
• Road and travel services provided by automobile clubs
• Condominium time-share exchanges
• Renting space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events
• Social event planning and coordination
• Leisure, recreational, and athletic instructional services
• Recreational camp tuition and fees
• Personal fitness training
• Massage, except when medically necessary
• Cosmetic surgery (specifically defined)
• Body modification, 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 (except for medical, educational, or veterinary reasons)
• Interior decorating and design
• Household moving
• 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 (specifically defined)

While some of these services are specifically defined, we will likely have to wait on the Kentucky Department of Revenue to provide additional guidance prior to the effective date on many of these newly taxable services.

Imposition of Other New Taxes and Fees

• Motor vehicle rental or sharing: Effective Jan. 1, 2023, a new 6% excise tax will be imposed on all limousine, peer-to-peer car sharing, taxicab, transportation network, and “U-Drive-It” certificate holders for the privilege of providing a motor vehicle for sharing or for rent, with or without a driver.
• Electric vehicle charging taxes: Effective Jan. 1, 2023, a new $.03 per kilowatt hour excise tax is on electric vehicle power distributed in Kentucky by an electric vehicle power dealer. An additional $.03 per kilowatt hour surcharge applies when the vehicle charging station is located on state property. The tax shall be added to the selling price charged at the electric vehicle charging station; if no fee is charged, the electric vehicle power dealer is responsible for paying the tax if the station is installed on July 1, 2022, or later.
• Electric vehicle fees: New electric vehicle ownership fees apply to initial and annual registration of electric vehicles, electric motorcycles, and hybrid vehicles.
• Expansion of accommodations tax: Kentucky’s existing transient room tax was broadened to specify that taxable short-term accommodations include cabins, lodgings, or other accommodations charged by any hotel, motel, inn, tourist camp, tourist cabin, campground, recreational vehicle park, or any other place in which accommodations are regularly furnished or by any person that facilitates the rental of the accommodations by brokering, coordinating, or in any other way arranging for the rental of the accommodation.

Tax Amnesty Program

Kentucky expects to hold a tax amnesty period from Oct. 1, 2022, through Nov. 29, 2022. Amnesty allows taxpayers with unpaid “specific taxes” liabilities which are incurred on or after Oct. 1, 2011, and prior to Dec. 1, 2021, to come into compliance. The taxes which are eligible for amnesty are all those administered by the Kentucky Department of Revenue including, but not limited to, personal and corporate income taxes, limited liability entity tax, and sales and use tax. Ad valorem taxes on real property, motor vehicles, motorboats, and personal property are specifically not included in the covered tax types. Under the amnesty provisions, the state will waive all penalties and 50% of the interest. Additionally, federal taxes which have been to the Kentucky Department of Revenue for collection purposes are eligible for tax amnesty. Taxpayers are eligible to participate as long as they are not aware of being under any criminal investigation. Taxpayers currently under audit may be eligible to receive the advantages of abated penalties and limited interest.

Kentucky will continue to administer their Voluntary Disclosure Program while amnesty is running. Voluntary Disclosure Program allows a taxpayer to initiate compliance with the Kentucky Department of Revenue. Benefits of the Voluntary Disclosure Program include limiting the look back period of filing returns and making tax payments to four years and all penalties being abated. Unlike the Tax Amnesty, taxpayers are liable for all interest calculated and assessed. Additionally, taxpayers cannot have been contacted by the Department of Revenue, be under audit for another tax, or have any other outstanding tax liabilities.

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.