May 25, 2016

Kentucky Governor Vetoes Some, But Not All, Tax Changes

Written By

By: Erica Horn and Maddie Schueler

Kentucky Governor Matt Bevin vetoed House Bill 423, which contained the majority of proposed changes to Kentucky’s tax code.  Examples of some of the provisions included in HB 423 are: exemption from sales tax of drugs purchased for the treatment of livestock, including cattle, sheep, goats, swine, and poultry, and the sale of bees used in a commercial enterprise; a refundable income tax credit for noise mitigation costs incurred by taxpayers who live near the Louisville airport; and a refundable tax credit for contributions to Kentucky’s 529 Plan.  While some of the provisions of HB 423 passed as part of some other bill, IRC conformity, for example, many did not.  The Governor issued this message with his veto: 

Given the overall financial condition of the Commonwealth and its massive unfunded pension liabilities, now is not the time to pass additional tax expenditures however meritorious each provision may be.  Each of the proposed tax changes contained in House Bill 423 would be appropriate for debate and potential inclusion in a comprehensive tax reform proposal, whereby the entire tax code and the appropriateness of each individual tax expenditure can be properly weighed against others.

The following changes, however, were enacted.

Internal Revenue Code Conformity Update.

The definition of “Internal Revenue Code” at KRS § 141.010(3) was updated to conform to the IRC in effect on December 31, 2015, “, exclusive of any amendments made subsequent to that date, other than amendments that extend provisions in effect on December 31, 2015, that would otherwise terminate, and as modified by KRS § 141.0101. (2016 HB 80.)

Data Center Exemption.

Effective July 11, 2016 KRS 91.260 and 92.300 are amended to clarify that qualified data centers constitute manufacturing establishments and therefore qualify for temporary exemption from local property taxes as an inducement to their locating within an applicable city or urban-county, as provided by local ordinance.  “Data center” is defined as a structure or portion of a structure predominately used to house and continuously operate computer servers and associated telecommunications, electronic data processing or storage, or other similar components.  Qualifying data centers must be established by the owner as having an overall tier rating of 3 or 4 under the TIA-942 Telecommunications Infrastructure Standard for Data Centers.  The amendments apply only to new manufacturing establishments locating in an applicable city or urban-county on or after the effective date of the legislation.  (2016 HB 237.)

Municipal Solid Waste Disposal Facilities.

“Municipal solid waste disposal facilities”, i.e., landfills, are removed from KRS § 136.115 and KRS § 136.120, which subjected the facilities to tax as public service companies.  Beginning with the 2017 tax year, landfills will be subject to property tax in the same manner as other commercial enterprises.  (2016 HB 402.)

Tax Forms and Instructions.

A new section of KRS Chapter 141 was enacted to require the KDOR to publish tax forms and instructions to those forms without promulgation of an administrative regulation, and amends KRS §§ 13A.110, 131.130, 141.050 and 141.068 to conform.  Chapter 141 addresses income taxation.  It is unclear how the section will apply to other taxes.  (2016 SB 129.)

Division of Taxpayer Ombudsman.

KRS § 131.020 has been amended to create a “Division of Taxpayer Ombudsman”.  Previously, the statute simply provided for a “taxpayer ombudsman”.  This statutory change is consistent with the Department of Revenue’s recent action to create a position for a practitioner liaison for CPAs and other professionals.  It appears the liaison will be part of the Division of Taxpayer Ombudsman as the liaison has been working with the ombudsman.  The Division Director will report directly to the Commissioner of the Department of Revenue. (2016 SB 293.)

Sales Tax Exemption for LLCs Owned by Non-Profit Organizations.

The purchases of a company disregarded as an entity pursuant to 26 C.F.R. sec. 301.7701-2 and wholly-owned by a nonprofit educational, charitable, or religious institution which has qualified for exemption from income taxation under Section 501(c)(3) of the Internal Revenue Code are exempt from sales and use tax effective August 1, 2016.  (2016 HB 52.)