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Kentucky Department of Revenue Issues Guidance to Taxpayers

The November 2016 issue of Kentucky Tax Alert and the December 2016 issue of Kentucky Sales Tax Facts published by the Kentucky Department of Revenue (the “Department”) contain several updates and reminders for taxpayers, including the following:

  • 2017 Interest Rate

Pursuant to KRS § 131.183, the tax interest rate for 2017 is 3%. The rate charged by the Department for unpaid taxes is 5%, and the rate paid as interest on refunds is 1%.

  • The CMRS 911 Prepaid Service Charge

Beginning January 1, 2017, a commercial mobile radio service (“CMRS”) prepaid service charge of $0.93 is imposed on all retail transactions involving the sale or purchase of (1) prepaid cellular phones; (b) prepaid calling cards for cellular phones; (c) additional minutes or airtime for a prepaid cellular phone; or (d) additional minutes or airtime for a prepaid calling card for cellular phones.  KRS § 65.7634.  The service charge is not subject to Kentucky sales tax when separately stated on the invoice.  KRS § 139.470(23)(c).  Retailers are required to report and remit the services charges to the Department on a monthly basis; the first return is due February 20, 2017.  Retailers may retain 3% of the monthly service charged collected and timely remitted as compensation for the cost of collections. 

  • Electronic Filing of Tax Returns

The Department has instituted a new system called “E-File” for filing online returns. The E-File system provides improved functionality for users who already file sales and use tax returns online and also extends electronic filing to other taxes, including transient room taxes, waste tire fees, and the new CMRS 911 service charge.  The new E-File system is accessed through the Kentucky Business One Stop portal at http://onestop.ky.gov/Pages/default.aspx. 

  • De Minimis Safe Harbor Limit for Tangible Property

Pursuant to Notice 2015-82, for taxable years beginning on or after January 1, 2016, the Internal Revenue Service increased the de minimis safe harbor threshold related to amounts paid to acquire or produce tangible personal property from $500 to $2,500 per invoice or item for taxpayers without applicable financial statements. The de minimis safe harbor rule contains capitalization and expensing requirements related to income tax reporting.  The Department reminds taxpayers that the rule is not applicable for Kentucky property tax purposes, and all taxable tangible personal property should be listed annually on the Tangible Personal Property Tax Return (Form 62A500).

With respect to the state income tax, Kentucky complies with federal laws and regulations in recognizing the safe harbor limit for the computation of gross and net income for taxable years beginning on or after January 1, 2014. Kentucky recognizes the federal increase to the safe harbor limit provided for in Federal Regulation 1.263(a)-1(f)(ii)(D) for taxpayers without applicable financial statements.

  • Exemption for Machinery for New & Expanded Industry

The Department reminds taxpayers that machinery for new and expanded industry is exempt from sales and use tax. KRS § 139.480(10).  To qualify for the exemption, the machinery must meet the four requirements in 103 KAR 30:120: (1) It must be machinery; (2) It must be used directly in the manufacturing process; (3) It must be incorporated for the first time into a plant facility established in the state; and (4) It must not replace other machinery unless it manufactures a new product, performs a different function than the machinery it replaces, or has a greater productive capacity measured by units of production.  Manufacturers must present a fully completed Form 51A111, Certificate of Exemption for New and Expanded Industry, to the seller at the time of purchase.

  • Agricultural Exemption

KRS § 139.480 exempts from sales and use tax certain purchases made for use in the business of farming. Pursuant to KRS § 139.480(11)(a), farm machinery used exclusively and directly in the occupation of tilling the soil for the production of crops, raising and feeding livestock for sale, or producing milk for sale is exempt from sales and use tax.  To qualify for the exemption, the purchaser must issue a fully completed Form 51A158 Farm Exemption Certificate to the retailer at the time of purchase. 

KRS § 139.480(14) and KRS § 139.480(15) exempt from sales and use tax the purchase of equipment, machinery, attachments, and any materials incorporated into the construction, repair, or renovation of on-farm facilities. The on-farm facilities must be used exclusively for grain or soybean storing, drying, processing, or handling or for raising poultry or livestock.  The purchaser must issue a fully completed Form 51A159 On-Farm Facilities Certificate of Exemption to the retailer at the time of purchase. 

Pursuant to 103 KAR 30:091 § 10 hand tools, lawn or garden equipment, and bedding materials such as chicken bedding, chicken litter, straw, sawdust, and wood shavings are taxable. In addition, the farming exemptions do not apply where the farming activities are for personal use or consumption.

  • Diesel Exhaust Fluid

Sales of diesel exhaust fluid (“DEF”) are subject to sales and use tax. If the DEF product is sold by the can, bottle, or drum, sales tax is added to the sales price.  If the DEF product is sold at the retail pump, the sales tax may be included in the sales price if it is not practicable to separately itemize the sales tax. See KRS § 139.210(2).  A statement must be posted at the pump indicating the sales tax is included in the selling price.  If the DEF product is purchased from an out-of-state retailer for use in Kentucky, the purchase is subject to the use tax.