United States

Kansas enacts various tax changes

Seeks additional collections through tax amnesty

TAX ALERT  | 

UPDATE: Based upon informal discussions with the Kansas Department of Revenue, it appears the department intends to take the position that the changes to the taxation of guaranteed payments are effective for tax years beginning on or after Jan. 1, 2015, and that, despite statutory language to the contrary, the department will not give these changes retroactive effect.


On June 16, 2015, Kansas Gov. Sam Brownback signed House Substitute for Senate Bill 270 and Senate Substitute for House Bill 2109, which collectively:

  • Delay planned decreases in individual income tax rates
  • Eliminate many personal itemized deductions
  • Change the tax treatment of guaranteed payments
  • Increase the sales tax rate
  • Expand the application of the sales and use tax
  • Place limitations on property tax increases
  • Provide for the establishment of a tax amnesty program

These provisions are summarized below.

Individual income tax

Applicable rates

The legislation delays scheduled decreases in individual income tax rates and provides that the following rates will be applicable:

For tax years 2015, 2016 and 2017, the individual income tax rates are:

For tax year 2018 and after, the individual income tax rates are:

Regardless of the rate brackets provided above, the legislation provides that, for tax years 2016 and after, married individuals filing joint returns with taxable income of $12,500 or less, and all other individuals with taxable income of $5,000 or less, will have a tax liability of zero.

Furthermore, the legislation provides that, starting with fiscal year 2020, additional rate reduction will be given in any fiscal year in which the amount of actual state general fund receipts less required increases in payments to the Kansas public employees retirement system from such fiscal year exceeds the actual state general fund receipts for the immediately preceding fiscal year by more than 2.5 percent.

Itemized deductions

The legislation eliminates many itemized deductions by providing that, for tax years beginning on or after Jan. 1, 2015, itemized deductions will be limited to:

  • 100% of section 170 charitable contributions
  • 50% of section 163(h) qualified residence interest
  • 50% of section 164(a) taxes on real and personal property

Flow-through taxation

The legislation provides that, for tax years beginning after Dec. 31, 2012, section 707(c) guaranteed payments cannot be subtracted from federal adjusted gross income. For this purpose, "guaranteed payments" include only those payments received from a flow-through entity that are reported to the taxpayer on federal Schedule K-1 (Form 1065-B), box 9, code F or on federal Schedule K-1 (Form 1065), box 4.

Other deductions

The legislation provides that, for tax years beginning after Dec. 31, 2013, a taxpayer may subtract from federal taxable income the net gain from the sale from Christmas trees grown in Kansas and held by the taxpayer for six or more years.

Credits

The legislation provides for the following new credits:

  • For tax years beginning after Dec. 31, 2014, an individual income taxpayer who purchased food in Kansas, had federal adjusted gross income for the tax year equal to or less than $30,615, and meets other statutory qualifications is entitled to an income tax credit equal to $125 for every exemption, other than an exemption for a dependent 18 years of age or older, that the taxpayer claimed on his or her federal income tax return. The credit is applied after all other credits, is not refundable and may not be carried forward.
  • For tax years beginning after Dec. 31, 2014, an individual income taxpayer is allowed a credit against his or her individual income tax for contributions to a low income student scholarship granting organization.

Additionally, the legislation extends the rural opportunity zone tax credit to Dec. 31, 2021, and expands the applicability of the individual development account tax credit to the individual income tax.

However, note that effective July 1, 2015, no income tax credit will be allowed to any individual who does not possess a valid Social Security number for the entire tax year in which the credit is claimed. This requirement will not apply to an individual who files as part of a married filing jointly return and whose spouse possesses a valid Social Security number for the entire tax year.

Sales and use tax

Rate increases

Effective July 1, 2015, the legislation increases the sales and use tax rates to 6.5 percent from 6.15 percent. Further, also effective July 1, 2015, the legislation increases the cigarette tax imposed upon all cigarettes sold, distributed or given away within Kansas to $1.29 per 20 cigarettes, or portion thereof, and $1.61 per 25 cigarettes from $0.79 and $0.99, respectively.

Electronic cigarettes

The legislation provides that, effective July 1, 2016, a tax in the amount of $0.20 per milliliter of consumable material is imposed on retail dealers for the privilege of selling or dealing in electronic cigarettes in Kansas. A retail dealer is required to pay the tax due when the retail dealer brings electronic cigarettes into Kansas for sale; manufactures or fabricates electronic cigarettes in Kansas for sale in state; or sells electronic cigarettes to consumers in Kansas, whichever occurs earliest.

Property tax

The legislation provides that any resolution by a city or county which increases the amount of property tax in excess of changes in the consumer price index will not become effective unless approved by a majority of the qualified city or county electors. The legislation specifies numerous circumstances under which voter approval is not required, including increases due to special assessments, bond or interest payments and infrastructure costs.

Tax amnesty program

The legislation provides for the establishment of a tax amnesty program that will run from Sept. 1, 2015, to Oct. 15, 2015. The amnesty program will be applicable to unpaid financial institutions privilege tax, estate taxes, income taxes, withholding taxes and estimated taxes, cigarette and tobacco products taxes, state and local sales and use taxes, liquor enforcement taxes, liquor drink taxes, and mineral severance taxes that (1) were due on or before Dec. 31, 2013, (2) were unpaid due to underreporting, nonpayment or non-reporting, and (3) are not under audit or the subject of an appeal. The amnesty program provides waiver of interest and penalties due as long as the taxpayer properly files a tax return for each tax period for which amnesty is requested, pays the entire balance of tax due and obtains approval from the Department of Revenue during the amnesty period. Participation in the amnesty program constitutes an express and absolute relinquishment of all administrative and judicial rights of appeal with respect to the tax liability, as well as all rights to refund or credit.

Takeaways

House Substitute for Senate Bill 270 and Senate Substitute for House Bill 2109 contain an array of provisions that are largely intended to spread the cost of closing the state's budget gap among individual taxpayers and consumers, and make up any additional shortfall in collections through a tax amnesty program. Decoupling almost entirely from federal itemized deductions is an unusual approach and individual taxpayers that make quarterly estimates may need to make a "catch-up" payment to cover the gap between estimates paid that were calculated with itemized deductions and the amount now due. Additionally, taxpayers with flow-through income should carefully consider the treatment of their income as guaranteed payments or ordinary income for federal tax purposes. In regard to sales and use tax, retailers will need to adjust their systems to account for the July 1, 2015, increase in the tax rate. Lastly, taxpayers with unpaid eligible taxes should review the provisions of the amnesty program and determine whether to participate.

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