Tax alert

Kentucky targets personal income tax cuts; expands sales tax base

Apr 14, 2022
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State & local tax Indirect tax

On April 13, 2022, the Kentucky General Assembly overrode Gov. Andy Beshear’s veto of House Bill 8, allowing for reductions to the commonwealth’s personal income tax, leaving open the possibility for further cuts in the future, creating an expansion of the sales tax base and making numerous other changes. The measure was originally passed by the legislature on March 29. The governor, citing concerns over potential revenue loss, vetoed the bill on April 8. The vote to override was overwhelming, passing by a margin of 28 to 8 in the senate and 72 to 25 in the house. A high-level summary of the changes follows below.

Personal income tax cuts

The new law will lower the state’s 5% personal income tax rate by .5% in 2023 assuming the Kentucky Department of Revenue confirms that certain revenue conditions are met. The bill provides that no later than Sept. 1, 2022, the department will review whether the state budget reserve trust fund account's end-of-the-year balance is equal to or greater than 10% of the state’s general fund revenues for the year, and the amount of general fund revenues at the end of the fiscal year are equal to or greater than the sum of the amount appropriated from the general fund that year, plus the amount of revenue that a 1% reduction to the rate would cost the state. If the conditions are met, the .5% reduction will be implemented for 2023.

Additionally, the department is required to annually evaluate whether the same fiscal conditions have been met, however, any additional personal income tax cuts must be approved by the general assembly.

Sales and excise tax expansion

House Bill 8 expands the commonwealth’s 6% sales tax rate to three dozen additional services, including photography and photo finishing services, marketing, telemarketing, public opinion and polling, lobbying, executive recruitment, web design and hosting, fax and private mailroom services, bodyguards, security system monitoring, lobbying services, private investigations, process servers, repossession services, background checks, parking, certain automobile club services, time-share exchanges, facility rentals, social event planning, instructional services, camp tuitions, personal fitness, massage, cosmetic surgery and body modification, certain testing services, interior design, moving services, specialized design services, lapidary services, commercial refrigeration repair, footwear repair, and prewritten computer software access services. The services are taxable effective Jan. 1, 2023.

The law also clarifies the application of the transient room tax and expands the imposition of the tax to those that facilitate the rental of the accommodations by brokering, coordinating, or in any other way arranging for the rental of the accommodations.

Miscellaneous changes

House Bill 8 advances the state’s IRC conformity to Dec. 31, 2021, for tax years beginning on or after Jan. 1, 2022, excluding the tax treatment of restaurant revitalization grants from the American Rescue Plan Act of 2021 (P.L. 117-2).

The law also creates a tax amnesty program to begin on Oct. 1, 2022, and run 60 days through Nov. 29, 2022, applicable to liabilities for taxable periods ending or transactions occurring on or after Oct. 1, 2011, but prior to Dec. 1, 2021, and any federal tax liability referred to the Kentucky Department of Revenue. The 60-day program will be pushed back to 2023 if the department is unable to secure a bid to run the program in 2022. Additional information will be provided by the department.  

Additional changes include the following:

  • A new 6% excise tax on peer-to-peer car-sharing, app-based ride-hailing services such as Uber and Lyft, sales of transportation network company services, and taxicab and limousine services
  • A new 3-cent-per-kilowatt-hour fee for electric vehicle charging and a 3-cent-per-kilowatt-hour surtax when the charging station is located on state property, with both taxes subject to change due to fluctuations in the National Highway Construction COST Index 2.0

Takeaways

The law as created by the override was not as ambitious as that first proposed by the General Assembly. The initial law would have set Kentucky on a course to become the tenth state that did not tax personal income. Still, because the law requires the department to continue assessing the established revenue triggers, there is the possibility of further reductions. Those will require additional legislative action and the governor’s approval.

Businesses should be aware of the expansion of the sales tax to many services provided in the commonwealth. Many of the changes will involve imposing sale and use taxes on business purchases of services such as marketing and lobbying. Businesses buying and selling such services in Kentucky should recognize the potential tax liabilities as well as new collection and filing responsibilities. Taxpayers with questions about House Bill 8 should speak with their Kentucky state and local tax advisers.

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