Advertising Material

Advertising Material


UPDATE: SUMMARY OF 2022 KENTUCKY TAX REFORM LEGISLATION

April 11, 2022

By

Timothy J. Eifler
Member, Stoll Keenon Ogden PLLC
502.560.4208
timothy.eifler@skofirm.com

Stephen A. Sherman
Counsel to the Firm, Louisville
502.568.5405
stephen.sherman@skofirm.com

Cameron F. Myers
Associate, Louisville
502.568.5410
cameron.myers@skofirm.com

As previously reported by SKO[1], Republican leadership in the Kentucky General Assembly announced its intent to pursue further “tax reform” during the legislature’s 2022 Regular Session.  That reform likely will be accomplished through multiple pieces of legislation, each of which will address separate aspects of Kentucky’s existing state and local tax structure.

This document provides a summary of the various bills introduced to date in the current legislative session which have been identified to be part of tax reform.  This summary will be updated periodically. 

The following bills have been identified to be part of the current tax reform effort and are summarized in this document:

Bill Number

Subject

Status

H.B. 6

State and Local Property Taxes on Motor Vehicles

Signed by Governor

H.B. 8

State Tax Changes

Passed House; passed Senate; delivered to Governor.

H.B. 475

Local Tax

Passed House; received in Senate.

H.B. 476

Local Tax

Passed House; received in Senate.

S.J.R. 99

State and Local Property Taxes on Motor Vehicles

Adopted

 

The above-listed legislative items make or propose to make the following changes to Kentucky’s current state and local tax structure. 

I.                    House Bill 8: State and Local Tax Reform

On March 29th, the Senate Appropriations and Revenue Committee adopted a committee substitute to House Bill 8 (the “Substitute”) and passed the Substitute out for consideration by the full House. On the same day, the house passed the Substitute. The Substitute was delivered to the Governor on March 30th. H.B. 8’s provisions, as revised in the Substitute, are outlined below.

     A.                 Individual Income Tax Rate Reduction

Kentucky levies an income tax on all income earned by Kentucky residents and all income earned by nonresidents from Kentucky sources.   The tax is levied at 5% of net income. 

H.B. 8 proposes to phase down the individual income tax rate from its current 5% to 0%.[2]   The Substitute updates the requirements for reduction of the rate. The tax rate would be reduced by 0.5% per taxable years beginning on or after January 1, 2023 if specified “reduction conditions” are met.

There are two defined reduction conditions. The first condition is that “the balance in the BRTF at the end of a fiscal year” shall be equal to or greater than ten percent (10%) of the “GF moneys” for that fiscal year. The second condition is that GF moneys at the end of a fiscal year shall be equal to or greater than “GF appropriations” for that fiscal year plus the “IIT equivalent” for that fiscal year.

The Department must review the reduction conditions no later than September 1, 2022 for the 2020-2021 fiscal year to determine if there will be a 0.5% reduction in the rate on January 1, 2023. If the conditions are met, the rate shall be reduced.

The Department will implement an annual process to review and report future reduction conditions at the same time and in the same manner as herein described, except that the relative succeeding years shall be used for future measurements of reduction conditions. However, unlike the initial reduction, no additional reductions may be implemented without action by the General Assembly.

Balance in the BRTF at the end of a fiscal year” means Kentucky’s budget reserve trust fund account and includes the following amounts and actions resulting from the final close of the fiscal year: (1) The amount of moneys in the fund at the end of a fiscal year; (2) All close-out actions related to a budget reduction plan under KRS 48.130 or as modified in a branch budget bill; and (3) All close-out actions related to the surplus expenditure plan under KRS 48.140 or as modified in a branch budget bill.

GF moneys” means receipts deposited in the general fund excluding tobacco moneys deposited in the fund established in KRS 248.654.

GF appropriations” means the authorization by the General Assembly to expend GF moneys, excluding: (1) Any appropriation to the budget reserve trust fund; and (2) Any lump-sum appropriation to a state-administered retirement system that is in excess of the appropriations specifically budgeted to meet the recurring statutorily required contributions or recurring actuarially determined contributions for a state-administered retirement system.

IIT equivalent” means the amount of reduction in GF moneys resulting from a one (1) percentage point reduction to the individual income tax rate.

In addition, H.B. 8 removes the income tax credits allowed for fiduciaries and for estates. H.B. 8 does not propose any changes to the Kentucky corporate income tax or the limited liability entity tax.

     B.                  Kentucky Income Taxes – Update the Internal Revenue Code Reference Date

The Substitute would update the reference to the Internal Revenue Code for Kentucky income tax purposes.  For tax years beginning on or after January 1, 2022, the Kentucky income tax would refer to the Internal Revenue Code in effect on December 31, 2021 (excluding Pub. L. No. 117-2, sec. 9673, relating to the income tax treatment of restaurant revitalization grants), and any amendments made subsequent to that date.[3]

     C.                  Sales and Use Taxes – Expansion to New Taxable Services / Revise Exemptions

Kentucky levies a sales tax of 6% of the gross receipts derived from retail sales of tangible personal property and digital property and the furnishing of certain services.  As a backstop, Kentucky also levies a use tax on the storage, use or other consumption in the state of tangible personal property, digital property, and extended warranty services.   The use tax is imposed at 6% of the sales price.

In 2018, the Kentucky General Assembly reduced the income tax rate and extended the sales tax to a number of additional services.[4]  H.B. 8 continues that trend by removing two existing exemptions and expanding the sales tax to thirty-eight (38) additional classes of services. The original version of H.B. 8 expanded the tax to thirty-nine services.  The Substitute removed “advertising and graphic design services” from the expansion.  H.B. 8 also would levy the use tax on the services that became subject to sales tax in 2018 and the additional services that H.B. 8 would make taxable.[5] 

Exempt certain limousine servicesThe General Assembly in 2018 imposed the sales tax on limousine services, if a driver is provided.[6]  H.B. 8 would exclude these services from sales and use tax but subject them to a new excise tax levied on the provision of motor vehicle for sharing or rent (discussed below in Section I.E.).[7] 

           1.                  New taxable services. 

H.B. 8 imposes the Kentucky sales and use taxes on thirty-five (35) new classes of services, some of which are defined and others the scope of which must be clarified by administrative regulation or the courts.  The Substitute removes “personal financial planning and investment management services,” “travel arrangement and reservation services,” and “pleasure watercraft docking, launching, and storage services” which were to be taxed under prior versions of H.B. 8.[8] Additionally, the Substitute restores the exemption from sales and use tax for “any fee paid for the use of a boat ramp for the purpose of allowing boats to be launched into or hauled out from the water” by excluding such fees from the definition of “admissions” subject to tax.[9]

 The new taxable classes are as follows:

Photography and photo finishing services”, defined to mean (i) the taking, developing, or printing of an original photograph, or (ii) image editing including shadow removal, tone adjustments, vertical and horizontal alignment and cropping, composite image creation, development, production, and refinement of a “master advertisement” prior to its reproduction as tangible personal property or digital property for the purpose of display or other advertising uses, including creative concept development, design, layout, consultation services, research, media monitoring and analysis, media planning or media buying, script and copy writing, graphic design, art preparation, public relations, placement of advertisements in print, broadcast, on billboards, or other media, and any other account management services (proposed new KRS 139.010(2)).  “Master advertisement” is defined to mean the original advertising or graphic design material created for reproduction as tangible personal property or digital property for the purpose of display or other advertising uses, including master commercials, camera-ready art, proofs, and corporate logos.

Marketing services”, defined to mean developing marketing objectives and policies, sales forecasting, new product developing and pricing, licensing, and franchise planning.

Telemarketing services”, defined to mean services provided via telephone, facsimile, electronic mail, or other modes of communications to another person, which are unsolicited by that person, for the purposes of:  (a) (i) promoting products or services; (ii) taking orders; or (iii) Providing information or assistance regarding the products or services; or (b) soliciting contributions.

Public opinion and research polling services.

Lobbying services.

Executive employee recruitment services.

Website design and development services.

Website hosting services.

Facsimile transmission services.

Private mailroom services” which specifically includes (a) presorting mail and packages by postal code; (b) address barcoding; (c) tracking, (d) delivery to postal service: and (e) private mailbox rentals.

Bodyguard services.

Residential and nonresidential security system monitoring services.

Private investigation services.

Process server services.

Repossession of tangible personal property services.

Personal background check services.

Parking services” which specifically includes (a) valet services and (b) the use of parking lots and parking structures. The Substitute adds an exclusion from tax for parking services at educational institutions.

Road and travel services provided by automobile clubs” as defined in KRS  281.010 (defining “automobile club” to mean a person that, for consideration, promises to assist its members or subscribers in matters relating to the assumption of or reimbursement of the expense or a portion thereof for towing of a motor vehicle; emergency road service; matters relating to the operation, use, and maintenance of a motor vehicle; and the supplying of services which includes, augments, or is incidental to theft or reward services, discount services, arrest bond services, lock and key services, trip interruption services, and legal fee reimbursement services in defense of traffic-related offenses).

 “Condominium time-share exchange services.

Rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events.

Social event planning and coordination services.

Leisure, recreational, and athletic instructional services.

Recreational camp tuition and fees.

Personal fitness training services.

Massage services, except when medically necessary.

Cosmetic surgery services”, defined to mean modifications to all areas of the head, neck and body to enhance appearance through surgical and medical techniques, but expressly excluding reconstruction of facial and body defects due to birth disorders, trauma, burns, or disease.

Body modification services” which specifically includes (a) tattooing, (b) piercing, (c) scarification, (d) branding, (e) tongue splitting, (f) transdermal and subdermal implants, (g) ear pointing, (h) teeth pointing, and (i) any other modifications that are not necessary for medical or dental health.

Testing services”, except testing for medical or veterinary reasons.

Interior decorating and design services.

Household moving services.

Specialized design service” which specifically includes the design of clothing, costumes, fashion, furs, jewelry, shoes, textiles, and lighting.

Lapidary services” which includes 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 services”,  defined to mean the right of access to prewritten computer software where the object of the transaction is to use the prewritten computer software while possession of the prewritten computer software is maintained by the seller or a third party, wherever located, regardless of whether the charge for the access or use is on a per use, per user, per license, subscription, or some other basis (proposed new KRS 139.010(35)).[10]

Grandfather provision.  H.B. 8 would exclude from tax gross receipts derived from these new taxable classes of services when either (a) sold in fulfillment of a lump-sum, fixed-fee contract or a fixed price sales contract executed on or before February 25, 2022 (the date H.B. 8 was introduced) or (b) a lease or rental agreement entered into on or before February 25, 2022.[11]

 De minimis exemption. KRS 139.470(23) and (24) exempts from sales tax certain services if the provider derives less than $6,000 of gross receipts from that service in a calendar year and has never crossed that threshold in a prior year.  H.B. 8 extends this “de minimis” exemption from sales tax to the services newly subjected to the sales tax by this Bill.[12]

 Reporting by event coordinators.   The Substitute would require any event coordinator of a festival or similar event to provide the Department with a list of vendors selling at the event any tangible property, digital property, or services subject to the sales tax.[13]

          2.                  Revise Existing Taxable Categories and Exemptions.

Broaden taxable extended warranty services to include real propertyIn 2018, the General Assembly imposed sales and use taxes on extended warranty services.  “Extended warranty services” currently is defined to mean services provided through a service agreement between the contract provider and the purchaser where the purchaser agrees to pay compensation for the contract and the provider agrees to repair, replace, support or maintain tangible personal property or digital property according to the terms of the contract if (a) the service contract is sold or purchased on or after July 1, 2018; and (b) the tangible personal property or digital property for which the service contract agreement is provided is subject to sales or use tax or the motor vehicle usage tax.

H.B. 8 would broaden taxable extended warranty services to service agreements where the provider is to repair, replace, support or maintain real property.[14] 

Repeal exemption for admissions to historical site.  Kentucky currently levies the sales tax on the sale of admissions but exempts admissions to historical sites.  H.B. 8 would repeal the exemption for admissions to historical sites, subjecting such admissions to tax.[15]   

Limit the exemption for residential utilitiesKentucky currently exempts from the sales tax gross receipts from the sale of sewer services, water, and fuel to Kentucky residents for use in heating, water heating, cooking, lighting, and other “residential uses”. Effective January 1, 2023, H.B. 8 would limit the exemption to utilities purchased for use at a resident’s place of domicile.[16]  “Place of domicile” is defined to mean the place where an individual has his or her legal, true, fixed, and permanent home and principal establishment, and to which, whenever the individual is absent, the individual has the intention of returning.[17]   

To simplify administration of the residential utility exemption, current law deems gross receipts derived from the following to be exempt purchases for “residential use”:

  • Those classified as “residential” by a utility company as defined by applicable tariffs filed with and accepted by the Public Service Commission;
  • Those classified as “residential” by a municipally owned electric distributor which purchases its power at wholesale from the Tennessee Valley Authority; and
  • Those classified as “residential” by the governing body of a municipally owned electric distributor which does not purchase its power from the Tennessee Valley Authority, if the “residential” classification is reasonably consistent with the definitions of “residential” contained in tariff filings accepted and approved by the Public Service Commission with respect to utilities which are subject to Public Service Commission regulation.

If the service is classified as residential under these rules, use other than for “residential” purposes by the customer shall not negate the exemption.

H.B. 8 would repeal these simplifying rules for determining residential use and require that vendors instead rely on customer declarations.[18]

Exemption for Farm Medications. The Substitute adds an exemption form the Kentucky sales and use tax for “drugs and over-the counter drugs… that are purchased by a person regularly engaged in the business of farming and used in the treatment of cattle, sheep, goats, swine, poultry, ratite birds, llamas, alpacas, buffalo, aquatic organisms, or cervids.[19]

     D.                 Levy of a New Electric Vehicle Power State Excise Tax

On or after January 1, 2023, H.B. 8 would levy a new excise tax (the “EVP Tax”) on (a) “electric vehicle power”; (b) “distributed” in Kentucky; (c) by an “electric vehicle power dealer” (an “EVP Dealer”); (d) “for the purpose of charging electric vehicles in this state.”[20]  The tax would be imposed at an initial base rate of three cents ($0.03) per kilowatt hour.[21]  The Substitute adds an additional surtax at an initial base rate of three cents ($0.03) per kilowatt hour when the electric vehicle charging station is located on state property.

The Substitute adds that, beginning January 1, 2024, the EVP Tax rate shall be increased or decreased by a percentage equal to the percentage change in the most recent quarterly National Highway Construction Cost Index 2.0 when compared to the same quarter in the prior year. Adjustments to the rate are to be rounded to the nearest one-tenth of one cent ($0.001).

The EVP Tax would be administered by the Department. The EVP Tax imposed is to be paid by the EVP Dealer to the State Treasurer and credited to the state’s Road Fund.

Each EVP Dealer must add the tax to the selling price charged by the EVP Dealer at the “charging station” on electric vehicle power sold in Kentucky.  If there is no selling price at the charging station, the electric vehicle power dealer is responsible for paying the tax on the electric power distributed by the charging station, except for charging stations installed prior to July 1, 2022.

Every EVP Dealer must report and pay the tax to the Department by the twenty-fifth (25th) day of each month.  The EVP Dealer must keep and preserve an accurate record of all receipts of electricity and tax together with invoices or other pertinent records and papers required by the Department for five (5) years.

The EVP Dealer is liable for the EVP Tax.  H.B. 8 also would impose personal liability for the EVP Tax on the EVP Dealer’s responsible corporate officers, limited liability company managers or officers and certain business entity owners. 

H.B. 8 provides the following definitions for the new EVP Tax:

Distribute” is defined to mean the delivery or transfer of electric power into the battery or other energy storage device of an electric vehicle at a location in Kentucky.

Electric vehicle power” is defined to mean electrical energy distributed into the battery or other energy storage device of an electric vehicle to be used to power the vehicle.

Electric vehicle power dealer” is defined to mean a person who owns or leases an electric vehicle charging station.

Electric vehicle” is defined to mean any vehicle that has plug-in charging capability, regardless of whether the vehicle is powered by: (a) an electric motor only; or (b) a combination of an internal combustion engine and electric power. (This same definition applies for purposes of the new battery reclamation and mitigation fees below).

Electric vehicle charging station” or “charging station” means any place accessible to general public vehicular traffic where electric power may be used to charge a battery or other storage device of a licensed electric vehicle.

     E.                  Levy of Electric vehicle Ownership Fees

Effective January 1, 2023, H.B. 8 would require county clerks to collect “electric vehicle ownership fees” from registrants of “electric vehicles, hybrid vehicles”, and “electric motorcycles” at the time of initial registration and each year upon annual vehicle registration.[22]  The battery reclamation and mitigation fee shall be: (a) one hundred twenty dollars ($120) for electric vehicles; and (b) sixty dollars ($60) for hybrid vehicles and electric motorcycles.  The Department shall adjust these fees on the same schedule and in the same manner as the adjustments to the EVP Tax discussed above, except such rounding is to the nearest dollar and the adjustments may not reduce the fee below the base fee set in H.B. 8. County clerks are required to transfer the fees fifty percent to the state General Fund and fifty percent to the road fund.

Electric vehicle” is defined the same as for the new EVP Tax discussed above.

Hybrid vehicle” is defined to mean any vehicle that does not have plug-in charging capability and is powered by a combination of an internal combustion engine and an electric motor.

Electric motorcycle” is defined to mean a motorcycle or motor scooter as defined by KRS 186.010 that is powered by either a (a) battery or equivalent energy storage device that can be charged with an electric plug using an external electricity source or (b) combination of an internal combustion engine and electric motor.

     F.                   Levy of New State Excise Tax on Motor Vehicle Sharing or Rent

Effective January 1, 2023, H.B. 8 would impose a new excise tax for the privilege of providing a motor vehicle for sharing or for rent, with or without a driver, within Kentucky on every holder of any of the following certificates: (a) limousine; (b) “peer-to-peer car sharing”; (c) taxicab; (d) transportation network (i.e., rideshare platforms like Uber and Lyft); and (e) U-Drive-It (i.e., rent-a-car companies).[23]  Kentucky law currently provides for special licensing certificates to be issued by the Kentucky Department of Vehicle Regulation for limousine, taxicab, transportation network and U-Drive-Its.  H.B. 8 would create a new licensing certificate for “peer-to-peer car sharing” (think Airbnb, but for cars) and impose the new tax on specified gross receipts earned by these certificate holders.

The tax would be levied at the rate of 6% of the “gross receipts” derived from the: (a) rental of a “shared vehicle” by a “peer-to-peer car sharing company”; (b) rental of a vehicle by a motor vehicle renting company (U-Drive-It certificate holder); (c) sales of transportation network company services; (d) sales of taxicab services; and (e) sales of limousine services.

Gross receipts” is defined to mean the total consideration received for the (a) rental of a vehicle, including the daily or hourly rental fee, fees charged for using the services, charges for insurance protection plans, fuel charges, pickup and delivery fees, late fees, and any charges for any services necessary to complete the rental transaction made by a peer-to-peer car sharing company or motor vehicle rental company (a U-Drive-It certificate holder) and (b) charges made to provide the service to a user, including any charges for time or mileage, fees for using the services, and any charges for any services necessary to complete the transaction made by a transportation network company, taxicab, or limousine service provider.

Peer-to-peer car sharing” means the authorized use of a motor vehicle by an individual other than the vehicle’s owner through a peer-to-peer car sharing program, excluding the operation of a U-Drive-It or the sale or provision of rental vehicle insurance.

Peer-to-peer car sharing certificate” means a certificate granting the authority for the operation of a peer-to-peer car sharing program.

Peer-to-peer car sharing company” means a person that operates a peer-to-peer car sharing program.

Peer-to-peer car sharing program” means a business platform that connects shared vehicle owners with shared vehicle drivers to enable the sharing of motor vehicles for financial consideration, excluding a U-Drive-It, motor vehicle renting company, rental vehicle agent, or service provider that is solely providing hardware or software as a service to a person or entity that is not effectuating payment of financial consideration for use of a shared vehicle.

Shared vehicle” means a motor vehicle that is available for car sharing through a peer-to-peer car sharing program, excluding any motor vehicle leased or rented by a person operating under a U-Drive-It certificate.

Shared vehicle driver” means an individual who has been authorized to drive the shared vehicle by the shared vehicle owner under a car sharing program agreement.

Shared vehicle owner” means the registered owner, or a person designated by the registered owner, of a motor vehicle made available for sharing to shared vehicle drivers, through a peer-to-peer car sharing program, excluding a person operating a U-Drive-It, motor vehicle renting company, or rental vehicle agent.

The new tax would be administered and collected by the Department of Revenue and deposited in the General Fund.  The tax would be a direct obligation of the certificate holder but “may” be charged to and collected from the user of the service.  The tax would be remitted monthly.  H.B. 8 also would impose personal liability for the tax on the certificate holder’s responsible corporate officers, limited liability company managers or officers and certain business entity owners

H.B. 8 would expressly exclude peer-to-peer car sharing program agreements from the U-Drive-It tax (KRS 138.462 and 138.463).  U-Drive-It certificate holders would continue to be subject to the U-Drive-It tax.

     G.                 Authorize Local License Fee on Providing Motor Vehicles for Sharing

The Substitute would amend KRS 68.200 to permit counties containing designated cities, consolidated local government, or urban-county government to levy a license fee on “peer-to-peer car sharing”, “U-Drive-It”, and “transportation network companies” not to exceed three percent (3%) of (a) the gross rental charges from rental agreements for a periods of thirty days or less by a peer-to-peer car sharing program or U-Drive-It or (b) the provision of “transportation network company services” by a transportation network company. The fee does not apply to U-Drive-It that receives less than seventy-five percent of its gross revenues generated in the county from gross rental charges. The fee is to be collected by (a) a U-Drive-It from the renters of the vehicle, (b) a “peer-to-peer car sharing program” from the “shared vehicle driver” and (c) a transportation network company from the purchaser of the transportation network company services.[24] The Substitute removes the exemption from state sales and use taxes for such rentals that was present in prior versions.

Peer-to-peer car sharing program agreement” is defined to mean the terms and conditions applicable to a shared vehicle owner and a shared vehicle driver that govern the use of a shared vehicle through a peer-to-peer care sharing program; and does not include rental or lease agreements entered with persons operating under a U-Drive-It certificate.

The remaining highlighted terms are as defined for purposes of the state excise tax on motor vehicle sharing or rent.

     H.                 Extension of Coal Severance Tax Refunds on Exported Coal

Kentucky imposes a coal severance tax of four and one-half percent (4.5%) of the gross value of coal severed or processed in the state.  A coal severance taxpayer may apply for a refund equal to the amount of tax paid if the coal is transported directly to a market outside of North America, provided the refund is claimed after August 1, 2020 but before July 1, 2022. The Substitute would extend the refund program an additional two years through July 1, 2024.[25]

     I.                    States Taxes on Insurance Companies – Require Estimated Tax Payments

The Substitute would require insurance companies to make estimated tax payments for state taxes on insurers.  The new requirement would apply to any insurer which had a tax liability of $5,000 or more in the prior year for any of the following taxes:

  1. Tax on capital of domestic life insurance companies (KRS 136.320);
  2. Tax on premium receipts life insurance company (KRS 136.330);
  3. Tax on amounts paid to stock insurance companies (KRS 136.340);
  4. Tax on amounts to mutual companies (KRS 136.325);
  5. Tax on amounts paid to stock insurance, to defray cost of administering fire prevention and insurance laws (KRS 136.360);
  6. Tax on attorneys for exchange of reciprocal or interinsurance contracts (KRS 136.370); and
  7. Retaliatory taxes (KRS 304.3-270).

The tax due will be paid in three (3) installments, one-third on or before June 1, one-third on or before October 1, and the remainder on or before the following March 1. Failure to pay estimated taxes when due will be subject to penalties and interest.[26]

     J.                    Authorize State and Local Transient Room License Taxes on Online Travel Companies and Airbnb

Cities and counties are authorized by statute to levy local “transient room taxes”             on the “the rent for every occupancy of a suite, room, or rooms, charged by all persons, companies, corporations, or other like or similar persons, groups or organizations doing business as motor courts, motels, hotels, inns or like or similar accommodations businesses.”[27]  Money collected from the tax is used to establish convention and tourist commissions “for the purpose of promoting convention and tourist activity” or to fund the Kentucky Center for the Arts Corporation.

The state also imposes a one percent (1%) state-level transient room tax on the same taxpayers and transactions as the local transient room taxes.[28]

The U.S. Court of Appeals for the Sixth Circuit rejected an attempt by the Louisville/Jefferson County Metro Government and the Lexington-Fayette Urban County Government to extend their local transient room taxes to fees charged by a number of online travel companies – Hotels.com, L.P., Expedia, Inc., Hotwire, Inc., Lodging.com, Orbitz, LLC,  Priceline.com, Site59.com, LLC, and Travelocity.com, LP.  See Louisville/Jefferson County Metro Gov’t v. Hotels.com, L.P., et al., 590 F.3d 381 (6th Cir. 2009) (affirming the U.S. District Court for W.D. Ky.); see similarly, City of Bowling Green v. Hotels.com, L.P., et al., 357 S.W.3d 531 (Ky.App. 2011), disc. rev. den. (Ky., Feb. 15, 2012).  The Sixth Circuit held that online travel companies were not subject to the tax because they were not “like or similar accommodations businesses.”  The Court’s decision applies to the state transient room license tax because the state tax statute is identical to the local enabling statutes. 

H.B. 8 would amend the various transient room tax statutes effective August 1, 2022 to extend the scope of the local taxes and the state tax to online travel companies and Airbnb by including “any person that facilitates the rental of the accommodations by brokering, coordinating, or in any other way arranging for the rental of the accommodations.”[29]  H.B. 8 creates a uniform definition of “rent” for purposes of the various local enabling statutes.  “Rent” is defined to mean the total amount charged for the rental of an accommodation and any charges for any services necessary to facilitate the rental of accommodations whether the amount is charged by the provider of the accommodations or by a person facilitating the rental of the accommodations by brokering, coordinating, or in any way arranging for the rental of the accommodations.[30] 

     K.                  Exemption from Local Real Property Tax for Prefabricated Home Inventory

The Substitute exempts from local real property tax all prefabricated homes held for sale in a manufacturer’s or retailer’s inventory.[31] Such homes remain subject to state real property tax only.

Prefabricated home” means a manufactured home, a mobile home, or a modular home.

Manufactured home” means a structure manufactured after June 15, 1976, in accordance with the National Manufactured Housing Construction and Safety Standards Act, transportable in one (1) or more sections, which when erected on site measures eight (8) body feet or more in width and thirty-two (32) body feet or more in length, and which is built on a permanent chassis and designed to be used as a dwelling, with or without a permanent foundation, when connected to the required utilities, and includes the plumbing, heating, air-conditioning, and electrical systems contained therein. It may be used as a place of residence, business, profession, or trade by the owner, lessee, or their assignees and may consist of one (1) or more units that can be attached or joined together to comprise an integral unit or condominium structure;

Mobile home” means a structure manufactured on or before June 15, 1976, that was not required to be constructed in accordance with the National Manufactured Housing Construction and Safety Standards Act, transportable in one (1) or more sections, which when erected on site measures eight (8) body feet or more in width and thirty-two (32) body feet or more in length, and which is built on a permanent chassis and designed to be used as a dwelling, with or without a permanent foundation, when connected to the required utilities, and includes the plumbing, heating, air-conditioning, and electrical systems contained therein. It may be used as a place of residence, business, profession, or trade by the owner, lessee, or their assigns and may consist of one (1) or more units that can be attached or joined together to comprise an integral unit or condominium structure.

Modular home” means a structure which is certified by its manufacturer as being constructed in accordance with all applicable provisions of the Kentucky Building Code and standards adopted by the local authority which has jurisdiction, transportable in one (1) or more sections, and designed to be used as a dwelling on a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air-conditioning, and electrical systems contained therein.[32]

     L.                   Increase of the Historic Rehabilitation Tax Credit

The Substitute would increase the credits available under the Kentucky Historic Rehabilitation Tax Credit.  The maximum credit which may be claimed with regard to owner-occupied residential property will be increased to one hundred twenty thousand dollars from sixty thousand dollars. The maximum credit which may be claimed with regard to all other property that is not owner-occupied residential will be increased to ten million dollars from four hundred thousand dollars.[33]

     M.               Time Limits and Interest Rates on Public Service Company Property Tax Protests

The Substitute would establish a one-year time limit within which the Department must respond to a timely protest submitted in dispute of a public service company property tax assessment.  Within one year of the submission, the department must issue the taxpayer (a) a fully executed written agreement to settle the protest, (b) a final ruling; or (c) resolution and closure of the protest. If the Department fails to do so, it must immediately issue a final ruling that accepts the taxpayer’s grounds of the protest, including the taxpayer’s proposed true value as stated in the protest.[34]

Additionally, the Substitute would set the tax interest rate for public service company property tax assessments equal to the federal short-term rate applicable to each quarter of the period that begins on the date the protest was filed by the taxpayer and ends on the due date of the tax as stated on the final tax bill. The two percent (2%) adjustment otherwise provided by subsection KRS 131.183(2)(a) does not apply.[35]

     N.                 New Refundable Decontamination Tax Credit

The Substitute includes a new transferrable Decontamination Tax Credit previously contained in H.B. 555.[36] 

For taxable years beginning on or after January 1, 2022, but before January 1, 2032, a taxpayer making a qualifying expenditure at a qualifying decontamination property shall be allowed a refundable credit against the individual and corporate income taxes and the limited liability entity tax. The credit awarded may be equal to the amount of expenditures made by the taxpayer for the decontamination or remediation of the qualifying decontamination property. However, the total credit awarded per qualifying decontamination property shall not exceed thirty million dollars ($30,000,000). The taxpayer may claim up to 25% of the total credit in any one tax year.[37]

Qualifying expenditures” means up to one hundred percent (100%) of the costs of materials, supplies, equipment, labor, professional engineering, consulting and architectural fees, permitting fees and expenses, demolition, asbestos abatement, and direct utility charges for voluntarily performing activities to decontaminate or remediate any preexisting hazardous substance, pollutant or contaminant, or petroleum and petroleum products, including but not limited to the costs of performing operation and maintenance of the remediation systems and equipment at the qualifying decontamination property beyond the year in which the systems and equipment are built and installed and the costs of performing the remediation activities following the taxpayer’s tax year in which the systems and equipment were first put into use at the qualifying decontamination property. Additionally, such expenditures must be in accordance with a corrective action plan approved by the Kentucky Energy and Environment Cabinet (the “Environment Cabinet”.[38]

Qualifying decontamination property” includes qualifying voluntary environmental remediation property as defined in KRS 141.418 and includes real property under the Brownfield Redevelopment Program as established in KRS 224.1-415, if the guidelines in KRS 141.418(1)(e) are met.

To qualify for the credit, certain conditions must be met. The decontamination or remediation may not be financed through a public grant program or the petroleum storage tank environmental assurance fund. The amount of reasonably anticipated total qualifying expenditures associated with the qualifying decontamination property shall equal or exceed ten million dollars ($10,000,000). The amount of reasonably anticipated capital investment in the qualifying decontamination property must exceed thirty million dollars ($30,000,000).The qualifying decontamination property must be located (1) within one-half (1/2) mile of a tax increment financing development area or (2) in a census tract that qualifies for the use of the Kentucky New Markets Development Program tax credit.[39]

To apply for the credit, the taxpayer must submit an application with the Environment Cabinet. The Environment Cabinet will determine the amount of credit approved for each applicant.[40] Any taxpayer approved for the credit may not also claim or apply for any other credit related to the decontamination or remediation of the same qualifying decontamination property.[41]

The Department has administrative oversight of claiming and transferring the credit and may promulgate regulations to implement the credit. The taxpayer receiving the credits may assign, sell, or transfer, in whole or in part, the tax credit to any other taxpayer by providing written notice to the Department within thirty days of the transfer with all required supporting documents.[42]

     O.                 Tax Amnesty

Kentucky’s last state “Tax Amnesty Program” occurred October 1 through November 30, 2021.  Under this Program, taxpayers may pay back taxes without penalties or fees and only half of the interest due.  The last Program was limited to taxable periods ending after December 1, 2001, but prior to October 1, 2011.

Program Period.  The Substitute would authorize a new Amnesty Program to occur during the period October 1, 2022 through November 29, 2022.[43] 

Eligible Tax PeriodsEligibility would be limited to taxable periods ending or transactions occurring on or after October 1, 2011, but prior to December 21, 2021, and any federal tax liability referred to the Department for collection.

Eligible Taxes Taxes, penalties, fees, or interest collected by the Department would be eligible for Amnesty.  Taxes levied or collected by authorities other than the Department would not be eligible for Amnesty.  Real property taxes levied and collected locally, property taxes on motor vehicles and motor boats collected by county clerks, and property taxes on tangible personal property payable to a local official would not qualify for Amnesty.  Additionally, certain penalties imposed on dealers or manufacturers of cigarettes are not eligible for Amnesty.  These penalties are described in KRS 131.630 and 138.205. 

Enhanced Penalties.  The penalties for failing to participate in the Program would be substantial if amounts for eligible periods are later determined to be due.  First, the interest rate on taxes not paid during Amnesty on Amnesty eligible amounts would be increased two percent (2%).  Second, a number of penalties and fees may be applied that could add to one hundred percent (100%) of the tax due.  These penalties include: (1) a twenty-five percent (25%) cost of collection fee; (2) a twenty-five percent (25%) assessment fee for taxes which are assessed and collected after the Amnesty period for taxable periods ending or transactions occurring prior to December 1, 2022; and (3) a fifty percent (50%) non-filed return fee for eligible periods.[44]

II.                  House Bills 475 and 476: Expand the Legislature’s Constitutional Authority to Authorize Local Taxes

The Kentucky Constitution provides that the authority of a local government to levy a tax must be authorized by statute.  Section 181 limits the General Assembly’s local tax authorizing authority to (i) ad valorem property taxes; and (ii) license taxes (a subset of excise taxes). See Driver v. Sawyer, 392 S.W.2d 52, 53 (Ky. 1965).  Excise taxes, such as income taxes and sales taxes, are not authorized.  City of Lexington v. Motel Developers, Inc., 465 S.W.2d 253 (Ky. 1971)). Local occupational license taxes on gross receipts, nets profits and/or wages have been upheld as license taxes measured by income, not unauthorized income taxes.  City of Louisville v. Sebree, 214 S.W.2d 248 (1948).

H.B. 475 and H.B. 476 seek to provide the General Assembly the authority to authorize any and all types of local taxes, including sales taxes and income taxes.  H.B. 475 proposes to amend Ky. Const. § 181 to permit General Assembly to authorize a county, city, town or municipal corporation to assess and collect local “taxes and license fees, including license fees on franchises” that are not in conflict with the Kentucky Constitution.  Section 181 would further be amended to provide that any local sales tax or use tax authorized must apply to the same base be administered in the same manner as any state sales of use tax.  This limitation is intended to ensure any local sales or use tax authorized complies with the Streamlined Sales and Use Tax Agreement, of which Kentucky is a full member.[45]   

H.B. 476 would limit current local taxing authority to what currently is authorized by statute.

Because it proposes a constitutional amendment, H.B. 475 must be approved by 3/5ths of all members of both the Kentucky House and Kentucky Senate.[46]  If passed, the proposed amendment must be published statewide by the Kentucky Secretary of State and must be approved on the November statewide ballot by a majority of those voting.[47]   

III. Miscellaneous Changes

     A.                 Senate Joint Resolution 99; House Bill 6: Freeze Valuation of Motor Vehicles for State and Local Property Taxes

Motor vehicles are required by statute to be valued based on the “average trade-in value” as provided by a standard manual prescribed by the Kentucky Department of Revenue.  The Department issued a January 26, 2009 memorandum to the county property valuation administrators stating that the “clean trade-in value” most closely met the constitutional “fair cash value” standard.  See Ky. Const. § 172.  The clean trade-in value is higher than the average trade-in value.

Due to production interruptions resulting from the COVID-19 shutdowns, used motor vehicle values have increased 40% between January 1, 2021 and January 1, 2022, resulting in a 40% increase in associated state and local property taxes.

The General Assembly has adopted Senate Joint Resolution 99 which exempts for the January 1, 2022 and January 1, 2023 assessment dates the portion of property taxes computed on any increase in a motor vehicle’s valuation from January 1, 2021 for all state and local property tax purposes.  The Resolution further directs the Governor to direct the Department of Revenue to “deviate from the standard value” in assessment motor vehicles for the January 1, 2022 and January 1, 2023 assessed dates “by not assessing the portion of property taxes” exempted and requires the Department to grant refunds.[48] 

Governor Beshear issued Executive Order 2022-096 (Feb. 16, 2022) to implement Senate Joint Resolution 99.  The Executive Order mandates that motor vehicle assessments for January 1, 2022 and 2023 shall be equal to the January 1, 2021 assessments.  It further orders the Department of Revenue and local taxing jurisdictions to establish procedures for refunds and requires county clerks to issue refunds within 180 days of the date the Executive Order was issued (i.e., August 15, 2022).

H.B. 6 was by the Governor on March 10, 2022. H.B. 6 requires beginning in 2023 that the average trade-in value (not the current rough trade-in or the clean trade-in value) to be used as the standard value of a motor vehicle for state and local property tax purposes.  The bill also exempts from taxation for the January 1, 2022 assessment date, any increase in value from the January 1, 2021 assessment.  Finally, the bill provides that taxpayers who overpaid could obtain refunds without written request and that such refunds be issued by the Department or county clerks within ninety (90) days H.B. 6 takes effect

     B. House Bill 8: Limit Use of the Department as General Collection Agent

Pursuant to KRS 131.130, the Department may enter agreements with any state agency, officer, board, commission, corporation, institution, cabinet, department, or other state organization to assume the collection duties for any debts due to such party. Additionally, pursuant to KRS 45.237 et seq. and 131.030, the Department has the power and obligation to collect certain other debts owed the state and its agencies.  The Department’s collection efforts may include imposition of a 25% collect fee and interest as well as garnishment of payments, bank accounts and tax refunds.  In Univ. of Ky. v. Moore, 599 S.W.3d 798 (Ky. 2019), the Kentucky Supreme Court held that the University was a state agency and therefore authorized to refer an individual’s delinquent UK HealthCare account to the Department of Revenue for collection.  

H.B. 8 would legislatively nullify Moore by amending KRS 131.130 to prohibit the Department from collecting or continuing to collect any consumer debts owed for health care goods and services. “Consumer debt” is defined as debt incurred by an individual for a personal or family purpose, regardless of whether an obligation has been reduced to judgment.[49]

****

[1] https://www.skofirm.com/publications/summary-of-2022-kentucky-tax-reform-legislation/

[2] H.B. 8, § 1, amending KRS 141.020.

[3] Id. at § 42.

[4] The 2018 Kentucky General Assembly reduced the income tax rate from 6% to 5% and expanded the sales tax to the following ten classes of additional services: (i) landscaping services; (ii) janitorial services; (iii) small animal veterinary services; (iv) pet care services; (v) industrial laundry services; (vi) non-coin-operated laundry and dry cleaning services; (vii) linen supply services; (viii) indoor skin tanning services; (ix) non-medical diet and weight reducing services; and (x) limousine services.

[5] H.B. 8, §§ 3, 6 and 7, amending KRS 139.010, 139.310 and 139.340.

[6] See KRS 139.200(2)(p).

[7] H.B. 8 § 3, amending KRS 139.200.

[8] Id.

[9] Id. at § 2.

[10] Id. at §§ 2 and 3, amending KRS 139.010 and 139.200.

[11] Id. at § 13, enacting a new statute in KRS Chapter 139.

[12] Id. at § 8, amending KRS 139.470.

[13] Id. at § 43, amending KRS 139.730

[14] Id. at § 2, amending KRS 139.010.

[15] Id. at §§ 3 and 4, amending KRS 132.200 and 139.482.

[16] Id. at § 8, amending KRS 139.470.

[17] Id.

[18] Id. at § 8.

[19] Id. at § 46, amending KRS 139.480.

[20] Id. at § 29, enacting new statute in KRS Chapter 138.

[21] Id. at § 29.

[22] Id. at §§ 30, 31 and 32.

[23] Id. at §9-12, amending KRS 281.010 and KRS 281.630, enacting a new statute in KRS Chapter 138, and amending KRS 138.462.

[24] Id. at § 40.

[25] Id. at § 41, amending KRS 143.022.

[26] Id. at § 44.

[27] See KRS 91A.390, 91A.392, 153.440 and 153.450.

[28] See KRS 142.400

[29] H.B. 8, §§ 15 – 26, amending KRS 91A.360-.400, 153.440-.450, 142.400 and KRS 65.060, and § 41.

[30] Id. at § 14.

[31] Id. at § 48.

[32] Id. at § 47.

[33] Id. at § 49.

[34] Id. at § 50.

[35] Id. at § 51.

[36] Id. at §§ 52-55.

[37] Id. at § 53.

[38] Id. at § 53.

[39] Id.

[40] Id.

[41] Id. at §§ 52-53.

[42] Id. at § 52.

[43] Id. at § 33.

[44] Id. at § 38.

[45] That agreement requires (a) uniformity in state and local tax bases with certain exceptions; (b) simplification of state and local tax rates; and (c) state-level of collection of local taxes (including state-level audits only).

[46] Ky. Const. § 256; for other bills, a simple majority of those voting is all that is required.

[47] Id.; Ky. Const. § 257; KRS 118.415.

[48] See Ky. Const. § 170 (providing that “[n]otwithstanding the provisions of Sections 3, 172, and 174 of this Constitution to the contrary, the General Assembly may provide by law an exemption for all or any portion of the property tax for any class of personal property.”).

[49] H.B. 8, § 28.