The Kentucky General Assembly has enacted sweeping tax reform legislation with House Bill (“HB”) 366, which was enacted into law on April 13, 2018 and HB 487, which became law today, when Governor Bevin failed to either sign or veto the bill. Combined, HB 366 & HB 487, broadens the tax base through various income tax and sales tax provisions, while introducing a flat income tax.
House Bill 366 and House Bill 487 Highlights
Income tax provisions:
Effective January 1, 2018 (unless otherwise noted)
- IRC conformity reference date for determining Kentucky income tax liability is December 31, 2017.
- Kentucky does not adopt federal income tax changes enacted by the Tax Cuts and Jobs Act related to:
- 100% bonus depreciation deduction under IRC Sec. 168(k) for property placed in service after September 27, 2017 and before January 1, 2023; or
- A $1 million dollar and $2 million investment phase out limit for the asset expense deduction under IRC Sec. 179.
- Taxpayers may still claim a depreciation and Sec. 179 expense deduction computed without regard to:
- Federal bonus depreciation; or
- IRC Sec. 179 amounts exceeding $25,000 dollar or $200,000 investment phase out limits.
Kentucky income tax rates and apportionment:
- Kentucky imposes income tax on businesses and individuals at a flat 5%;
- Kentucky replaces its three-factor, double-weighted sales apportionment formula with a single sales factor formula for tax years beginning after 2017;
- Kentucky adopts market-based sourcing rules. The rules apply to sales of other than tangible personal property (g., services). In general, if a taxpayer’s “market” for sales is in Kentucky, the receipts must be assigned to the state.
- A throwout rule also applies to the denominator of the receipts factor if the business is not taxable in the state where it assigns the receipts.
- Kentucky clarifies that for alternative apportionment, the party seeking the alternative method carries the burden to provide that:
- The standard method does not fairly represent the taxpayer’s business activity in Kentucky; and
- Another method is reasonable.
- For tax years beginning after 2018, it requires combined income tax reporting by corporations that are members of a unitary business group unless the group files a consolidated Kentucky return.
- Extends the deadline for submitting a copy of a final federal income audit to 180 days.
- Mandates electronic income tax return filing by corporations and pass-through entities that report $1 million or more in federal gross receipts for the tax year.
Business inventory tax credit:
The legislation creates a nonrefundable and nontransferable credit for state and local property taxes paid on business inventory. The credit may be applied to income tax and LLET. The credit is phased in over four (4) years:
- 25% of inventory taxes paid for 2018;
- 50% of inventory taxes paid for 2019;
- 75% of inventory taxes paid for 2020;
- 100% of inventory taxes paid for tax years after 2020.
Sales tax provisions:
Effective July 1, 2018 (unless otherwise noted)
Broadening of tax base to services:
- Sales tax to the following services:
- Landscaping services, like lawn care, tree trimming, landscape design, and snow plowing;
- Small animal veterinary services;
- Pet care services (grooming, boarding, pet sitting, pet obedience);
- Industrial laundry services (uniform supply, protective apparel, industrial mat & rug supply);
- Non-coin-operated laundry and dry cleaning services;
- Linen supply services (table and bed linen and nonindustrial uniform supply services);
- Indoor skin tanning services (tanning booth, tanning bed, and spray tan);
- Non-medical diet and weight reducing services;
- Limousine services (with a driver);
- Charges for installing or applying tangible personal property, digital property or services sold;
- The bill exempts labor or services to apply, install, repair, or maintain tangible personal property used in manufacturing or industrial processing, if not otherwise exempt.
- Charges for short-term lodging offered to transients by campsites, campgrounds, and recreational parks;
- Extended warranty services, which are defined as:
- Services provided through a service contract agreement between the contract provider and the purchaser where the purchaser:
- Agrees to pay for the contract; and
- The provider agrees to repair, replace, support, or maintain tangible personal property or digital property under the contract.
- The sales tax exemption for pollution control facilities has been removed.
Economic nexus standard to sales tax:
- Kentucky adopts an “economic nexus” standard for sales tax, which requires a seller to collect and remit Kentucky sales tax if:
- The seller made at least 200 separate transactions to Kentucky purchasers in the prior or current calendar year; or
- The seller’s gross receipts from the sale of property to Kentucky purchasers in that period exceeds $100,000.
Taxable admissions standard:
Amends the definition of taxable “admissions” to fees paid for:
- The right of entrance to a display, program, sporting event, music concert, performance, play, show, movie, exhibit, fair, or other entertainment or amusement event or venue; and
- The privilege of using facilities or participating in an event or activity.
- Modifies the definition of “pre-written computer software” to exclude separately stated modifications or enhancements.
- Increases cigarette tax from 56 cents to $1.06 per pack of 20 cigarettes.
- New tire fee increased from $1 to $2 per new tire.
- Clarifies “cost of production” in the energy or energy-producing fuels used in manufacturing, processing, mining, or refining.
Tangible personal property tax provisions:
For assessment dates beginning January 1, 2019, forward, computer software will be exempt from state and local ad valorem taxes. The exemption does not include pre-written computer software.
For more information on the new Kentucky tax reform legislation, please contact MCM Partner Mike Grim via e-mail or phone (502.882.4510).