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On April 13, 2022, the Kentucky General Assembly overrode Gov. Andy Beshear’s veto to enact legislation that makes several amendments to Kentucky tax law. Specifically, H.B. 8 provides conditions that would reduce the personal income tax rate to 4.5%, updates the Internal Revenue Code (IRC) conformity date to Dec. 31, 2021, and authorizes a tax amnesty period.1 The bill also creates a decontamination property credit and amends the certified historic rehabilitation credit.
Additionally, the legislation broadens Kentucky’s tax base by subjecting several new categories of services to the state’s sales and use tax. This expanded taxability is accompanied by a partial temporary transition relief applicable to annual gross receipts below $6,000. Kentucky will also levy new excise taxes on peer-to-peer car sharing and electric car charging. Finally, the law expands the scope of the state’s transient room tax.
Personal income tax rate reduction
If certain budget goals are met, the personal income tax rate will be reduced from 5% to 4.5% for the year beginning Jan. 1, 2023.2 By Sept. 5, 2022, the Kentucky Department of Revenue and the Office of State Budget Director will review the rate reduction conditions for the 2020-2021 fiscal year and will determine if the reduction conditions have been met.3 The Department must also institute an annual process to review and report future reduction conditions. However, the General Assembly must take action to implement a rate reduction beyond the 2023 tax year.4 Additionally, the personal income tax credits for a fiduciary and an estate are eliminated.5
IRC conformity date
For taxable years beginning on or after Jan. 1, 2022, references to the IRC within the Kentucky income tax law means the IRC in effect on Dec. 31, 2021. This excludes Public Law No. 117-2, Sec. 9673, which relates to the tax treatment of restaurant revitalization grants; and any amendments made after that date.6
Tax amnesty
A tax amnesty period from Oct. 1 to Nov. 29, 2022, will be available to taxpayers, even those under audit, that owe:
- Taxes, penalties, fees, or interest subject to the administrative jurisdiction of the Department except for:
- Ad valorem taxes levied on real property
- Ad valorem taxes on motor vehicles and motorboats collected by the county clerks
- Ad valorem taxes on personal property that are payable to local officials
- Any penalties imposed under Ky. Rev. Stat. Ann. Secs. 131.630 or 138.205
- Federal taxes, penalties, fees, or interest referred to the Department from the federal government for collection purposes7
The program will apply to tax liabilities for taxable periods ending or transactions occurring on or after Oct. 1, 2011, but prior to Dec. 1, 2021, and any federal tax liability referred to the Department.8
For taxpayers meeting the amnesty provisions, penalties generally will be waived, and interest will be assessed at one-half the tax interest rate, with the exception of installment payment agreements, which are subject to the full interest rate. Amnesty may be disallowed if the taxpayer fails to timely file required returns and timely pay the required payments, or if all payments under an installment agreement are not made by May 21, 2023.9 Substantial penalties and elevated interest apply in cases where amnesty-eligible tax liabilities are not addressed during this amnesty program.10
Credits and incentives
H.B. 8 affects the following the credits:
- Decontamination Credit: For taxable years beginning in 2022 through 2031, taxpayers making a qualified expenditure at a qualifying decontamination property will be allowed a refundable credit applicable against corporate and personal income tax, as well as limited liability entity tax. The credit, which is transferable to other taxpayers, is equal to the amount of expenditures made by the taxpayer, and the total credit per qualifying decontamination property may not exceed $30 million. Additionally, the amount of credit taken in a taxable year may not exceed 25% of the total amount of approved credit.11
- Certified Historic Rehabilitation Credit: The maximum certified historic rehabilitation credit will be increased from $60,000 to $120,000 for owner-occupied residential properties. The maximum credit amount for all other property will be increased from $400,000 to $10 million. Additionally, only financial institutions may transfer or assign the credit.12 This goes into effect 90 days after adjournment.13
Newly taxable services
Effective Jan. 1, 2023, Kentucky’s sales and use tax base will expand to include 35 new types of taxable services, all of which will be subject to Kentucky’s full 6% sales and use tax rate.14 In addition, a transitional rule has been adopted allowing relief to persons selling minimal amounts of these services. The transitional rules states that for persons selling the newly taxable services prior to Jan. 1, 2023, gross receipts from those services are not taxable if such gross receipts were less than $6,000 during 2021.15 If this threshold is surpassed, gross receipts in excess of $6,000 will be fully taxable in that calendar year, and gross receipts of any amount will be taxable in subsequent calendar years.16 Similar transitional relief is provided to persons selling minimal amounts of these taxable services in the first calendar year of operation in 2023 and beyond.17
Other sales and use tax changes
H.B. 8 makes other miscellaneous changes to Kentucky’s sales and use tax laws, effective January 1, 2023. “Extended warranty services” will be redefined to include agreements relating to real property.18 Sales and use tax upon “sale of admissions” will now include “(a)dmissions to historical sites,” which were previously exempt.19 The exemption for sales of “sewer services, water, and fuel to Kentucky residents” will now be applicable only to the resident’s “place of domicile,” as statutorily defined.20 Drugs purchased by farmers will be exempt when “used in the treatment of cattle, sheep, goats, swine, poultry, ratite birds, llamas, alpacas, buffalo, aquatic organisms, or cervids.”21 Finally, “any event coordinator of a festival or similar event” will be required to send the Department a list of vendors that sell “tangible personal property, digital property, or services” that are subject to sales and use tax.22
Additional enactments
H.B. 8 contains numerous additional provisions addressing taxes to be imposed on specified industries, including special excise taxes, transient room taxes, and insurance premium estimated taxes. In addition, H.B. 8 provides several forms of substantive and procedural relief to taxpayers apart from income and sales taxes.
- Special excise taxes / fees. Starting Jan. 1, 2023, a “peer-to-peer car sharing” tax will apply to the “authorized use of a motor vehicle by an individual other than the vehicle’s owner through a peer-to-peer car sharing program.”23 Peer-to-peer car sharing providers will be responsible to remit tax on a monthly basis, but such taxes may be passed through to the user.24 In addition, an excise tax of $0.03 per kilowatt hour will be imposed upon electric vehicle power used by a dealer to charge electric vehicles, starting January 1, 2023, and a surtax of an additional three cents will apply to charging stations located on state property.25 Electric vehicle power dealers will be responsible to remit tax on the 25th of each month.26 Ownership fees of $120 for electric vehicles and $60 for electric motorcycles or hybrid vehicles will also take effect.27
- State and local transient room taxes. These taxes will apply to the rent for every occupancy of lodgings where accommodations are regularly furnished to transients for consideration, but do not apply when accommodations are supplied for a continuous period of 30 days or more.28
- Insurance premium estimated taxes. Insurance companies are required to make estimated tax payments if their insurance premium taxes in the previous year were $5,000 or more. The tax must be paid in three equal installments, due June 1, Oct. 1, and the following March 1.29
- Coal severance tax rebate. This rebate, which was previously effective until 2022, has been extended until July 1, 2024. Taxpayers engaged in severing or processing coal within Kentucky that have paid the coal severance tax may apply for a refund of the amount paid, if the coal is transported directly to a market outside of North America.30
- Health care debt collection prohibition. Effective 90 days after adjournment, the Department is prohibited from collecting any consumer debt owed for health care goods and services.31
- Prefabricated home exception. For property assessed after Jan. 1, 2023, prefabricated homes (manufactured, mobile or modular) held for sale in a manufacturer’s or retailer’s inventory are exempt from local property taxes. Prefabricated homes will remain subject to state property tax.32
- Protests of public service company property tax assessments, and applicable interest rate on additional taxes billed. If a public service company files a timely protest in dispute of a property tax assessment under Ky. Rev. Stat. Ann. Sec. 136.120 to Ky. Rev. Stat. Ann. Sec. 136.180 and does not receive a final settlement of the protest within one year from the filing date, the Department must immediately issue a final ruling that accepts the taxpayer’s grounds of the protest, including the proposed true value as stated in the protest.33 For additional tax billed in accordance with Ky. Rev. Stat. Ann. Sec. 136.180(2) concerning operating property of public service corporations, the tax interest rate is equal to the federal short-term rate applicable to each quarter of the period that begins on the date the protest was filed and ends on the due date of the tax reflected on the final tax bill.34
- Water withdrawal fees. For the fiscal year beginning July 1, 2022, and ending June 30, 2023, and the fiscal year beginning July 1, 2023, and ending June 30, 2024, water withdrawal fees imposed by the Kentucky River Authority are not subject to state and local taxes.35
- Certificates of delinquency. For the fiscal year beginning July 1, 2022, and ending June 30, 2023, and the fiscal year beginning July 1, 2023, and ending June 30, 2024, notices related to certificates of delinquency purchased by third party purchasers must be sent by certified mail. Additionally, a copy of each notice must be sent to each mortgagee who holds a mortgage on the property that is subject to the certificate of delinquency.36
Commentary
With this legislation, Kentucky provides taxpayer consideration and assistance in a variety of ways through the potential for a broad-based personal income tax rate reduction, a robust tax amnesty program, and an expansion of credits available to taxpayers.
This legislation will have a significant impact on individual taxpayers through the contingent income tax rate reduction from the previously reduced rate of 5% enacted by H.B. 366 in 2018. Additionally, the available tax amnesty program will incentivize delinquent taxpayers to come forward and remit unpaid tax. These favorable adjustments continue to work towards Governor Andy Beshear’s goal of attracting more employers and individuals to the Commonwealth.
The sales and use tax changes under H.B. 8 represent a significant shift towards a consumption-based tax system, as well as a step towards greater neutrality of treatment between goods and services, in recognition of Kentucky’s service-based economy. While many tax policy experts have advocated such changes, they will increase complexity for many service providers, particularly those whose services are not clearly categorizable or whose annual gross receipts in Kentucky are within the range of $6,000. Farm operators, car rental and rideshare companies, and electric vehicle power dealers should be cognizant of other tax changes made under H.B. 8.
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