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Kentucky counties, school districts and many cities are authorized to impose occupational license fees (in short, taxes) on businesses. Currently, more than 200 Kentucky cities and counties as well as eight school districts require payment of the fees. These local governments generally impose the fees on net profits or gross receipts. Recently, the General Assembly has taken steps to make the rules governing the occupational license fees more uniform. This uniformity will reduce the burden of compliance for businesses. Also, recently some local governments have been improperly administering the fees when it applies to businesses with sales in more than one local jurisdiction. This action by the local governments may result in businesses paying the fees on more than 100 percent of their net profits or gross receipts.
Adopting Uniform Practices
In 2003, the Kentucky Occupational License Association, Inc. (KOLA), an association of local government employees involved in the administration and collection of occupational license taxes, successfully lobbied the General Assembly to enact a set of uniform definitions as well as provide for the uniform administration of local occupational license fees. The result was a uniformity statute that became mandatory in 2008 for all local taxing jurisdictions. The statute decrees a uniform method for calculating the tax base, that is net profits or gross receipts, and a uniform method for apportioning net profits or gross receipts to each local jurisdiction.
In a further effort toward uniformity, and to reduce the burden on businesses, the 2012 General Assembly enacted a new statute which authorizes local governments imposing occupational license fees to accept a new standard form being developed by the Kentucky Secretary of State. Use of the standard form is mandatory on or after July 1, 2017, but the form is expected to be available before then. Local governments have the option of whether to accept the new form prior to that date.
Local Governments’ Noncompliance Regarding Apportionment
For businesses with sales and/or payroll in more than one jurisdiction, the uniformity statute offers an apportionment regime consisting of a two-factor formula of payroll and sales revenue. The payroll factor consists of a fraction, the numerator of which is the total compensation paid or payable in the local jurisdiction and the denominator of which is the total compensation paid everywhere. The sales factor is also a fraction — the numerator is the total sales revenue in the local jurisdiction and the denominator is total sales revenue everywhere. Businesses with payroll and sales in more than one local jurisdiction apportion using the average of both factors. The statute provides that business entities with only sales revenue in more than one tax district apportion their net profits or gross receipts using the sales factor. This is called single sales factor apportionment.
Despite the clear mandate of the apportionment statute, local governments are refusing to allow businesses having payroll only in the local jurisdiction but sales in multiple jurisdictions to use the single sales factor to apportion. Those jurisdictions, with the support of KOLA, are claiming that the language in the statute contains a drafting error. The jurisdictions’ inaccurate interpretation of the statute would result in substantial increases in the amount of netprofits or gross receipts apportioned to the local government where the business’ employees are located. With this in mind, local jurisdictions have been rejecting returns using a single sales factor to apportion.
The language of the statute is clear and binding upon all local governments in Kentucky. If your business has employees in only one local jurisdiction while selling to customers outside the jurisdiction, you are entitled to apportion using only the sales factor. Please contact Stoll Keenon Ogden if you have any returns rejected on this basis or questions about the uniformity statute in general.
By Tim Eifler, Stoll Keenon Ogden PLLC