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New State Law's Inequities Adversely Affect Taxpayers

Question: On April 24, Gov. Beshear signed into law H.B. 704, a tax-related bill passed by the General Assembly on April 15. What are the provisions of the new law, and how will they affect taxpayers?

Answer: This new law included a hodgepodge of provisions important to certain businesses, nonprofits, individuals and governmental entities.

H.B. 704:

  • Exempts certain premiums collected from governmental and nonprofit institutions from the insurance premium surcharge of 1.5 percent, which benefits certain trust accounts for firefighters and law enforcement;
  • Requires each person who first brings tobacco products into Kentucky to report shipments to the Department of Revenue each month;
  • Extends the deadline for filing a farmers' cooperative income tax return to Sept. 15 for a calendar year taxpayer (or the equivalent for a fiscal year taxpayer);
  • Disallows a refund to a utility of utility gross receipt tax for schools if it increased its rate to recoup the tax unless it refunds or credits the overpayment to its customers and also imposes a $25 penalty (maximum of $10,000 per month) per error made to billing school tax to customers;
  • Places responsibility on a charity, rather than the auctioneer, on the sale of items at a charitable auction under certain circumstances;
  • Reduces the time period within which unclaimed property is presumed abandoned and escheats to (becomes the property of) the commonwealth;
  • And amends statutory provisions which provide equalized support to schools for debt service, new facilities and major renovations of existing school facilities.

Beyond the above, this legislation retroactively, for tax refunds issued by the commonwealth of Kentucky after April 24, 2008, purports to eliminate interest which the commonwealth would otherwise have been required by law to be paid to taxpayers with outstanding tax refund claims.

Under the new law, interest on a tax refund begins to accrue to the benefit of a taxpayer on the latest of the involved tax return's original due date, extended due date, actual filing date, date of payment, or amended return filing date.

As a practical matter, most businesses and people file amended returns months, sometimes years, after they file an original return.

So, because interest does not begin to accrue until the date that a taxpayer files an amended return claiming a refund, in some cases the commonwealth could have the use of any given taxpayer's money for up to four years without being obligated to pay interest on the tax refund.

In contrast, interest on a tax bill assessment starts to run from the date the tax is required to be paid until the date that a taxpayer actually pays the tax. This sets up the potential to adversely impact innocent taxpayers.

A not uncommon scenario highlights the inequity of the new law. Say an individual wage earner files her Kentucky individual income tax return (Form 740) for the calendar tax year 2005, which is due on April 15, 2006. All of her tax payments would be remitted via her employer as tax withheld from her wages, effectively paid in 2005.

In conjunction with filing her 2007 tax return in early 2008, her accountant notices that the individual had failed to itemize her deductions, rather than take the standard deduction, so she files an amended return (Form 740-X) for the 2005 calendar tax year on April 14, 2008, to claim the refund.

If the commonwealth had paid the refund on April 20, 2008, the individual would have received interest going back to April 15, 2006 -- two years worth of interest.

However, under the new law, even though the commonwealth had the use of the individual's money for at least two years, the commonwealth would start its interest calculation based on the April 14, 2008, date.

The individual has essentially lost at least two years worth of interest.

A small (standard in many states) grace period of 60 or 90 days (depending on the tax type) for the commonwealth to pay a refund without having to pay interest, remains.

So, in the above example, if the commonwealth pays the refund on April 30, 2008, the taxpayer would receive no interest whatsoever.

Equally significant, this new law also changes the interest rate on tax bills/assessments effective May 1, 2008, to prime plus 2 percent and on refunds to prime less 2 percent.

While in the past, the interest rates for both assessments and overpayments were the same, this law creates a four percentage point spread or arbitrage to the detriment of what can only be assumed to be many taxpayers.

Mark A. Loyd, CPA, is an associate in the tax and finance practice group of Greenebaum Doll & McDonald in Louisville and is a member of the Kentucky Society of CPAs Board of Directors.

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