2016 Kentucky Tax Legislation Wrap-Up: Tax reform is on the horizon
The Kentucky State Legislature recently wrapped up its 2016 legislative session, with some tax legislation meeting Governor Bevin’s approval and being signed into law. Governor Bevin has promised to explore the possibility of tax reform for future years. Some of the legislative highlights in the area of tax follow.
- Taxpayer Ombudsman: 2016 S.B. 293 creates a “Division of Taxpayer Ombudsman” in the Office of the Commissioner of the Department of Revenue. There will be a division director who reports to the tax commissioner. The Division of Taxpayer Ombudsman will help solve taxpayer complaints and problems, provide recommendations related to improving and revising informational publications and facilitating voluntary taxpayer compliance, and suggest other improvements to the Kentucky Department of Revenue and its administrative purview. This is a good first step toward strengthening the Kentucky Taxpayer Bill of Rights.
- Administrative Regulations: 2016 S.B. 129 makes several reforms to the administrative regulation process. It removes the requirement that the Department of Revenue publish tax forms and instructions to those forms by promulgating an administrative regulation. This law also repeals KRS 13A.140, which provides that an administrative regulation is presumed valid. Practitioners have been concerned about proper notice to affected parties and the legal effect of the Department’s tax forms because, for example, changes to tax forms were not apparent like in substantive regulations, which highlight added, deleted, or modified language in the regulation itself. S.B. 129 addresses these concerns.
- Conformity with the Internal Revenue Code: 2016 H.B. 80 revises the definition of the Internal Revenue Code within the Kentucky Revised Statutes to mean the Code as in effect on December 31, 2015, exclusive of any amendments made after that date and inclusive of amendments that extend provisions from that date that would otherwise have terminated. The prior date was December 31, 2013.
- Non-Profit Exemption: 2016 H.B. 52 exempts purchases made by any resident, single member limited liability company that is wholly owned by a resident or nonresident 501(c)(3) organization from sales and use tax. The single member LLC must be disregarded as an entity separate from the nonprofit.
- Water Withdrawal Fees: 2016 H.B. 80 exempts water withdrawal fees imposed by the Kentucky River Authority from state and local taxes. The exemption expires on June 30, 2018.
- Landfills: 2016 H.B. 402 revises the valuation and assessment methodology for landfills. Prior to this law’s passage, landfills were valued and assessed in the same manner as public service companies; now, they will be subject to the same methodology as most taxpayers. The Department of Revenue, not the local county assessor, will value municipal solid waste disposal facilities. The law also classifies certain pollution control property that is part of the solid waste disposal facility as tangible personal property instead of real property.
- Data Centers: 2016 H.B. 237 creates a 5-year city tax exemption for qualified data centers by deeming them manufacturing facilities. A “data center” is a “structure or portion of a structure that is predominantly used to house and continuously operate computer servers and associated telecommunications, electronic data processing or storage, or similar components.” The exemption applies only to a new data center that chooses to locate in the city or county after July 15, 2016.
- CMRS Fees: 2016 H.B. 585 replaces the current Commercial Mobile Radio Service (“CMRS”) (also known as 911 emergency service fees) prepaid service charge with a new retail charge at a flat rate of 93 cents on each retail transaction involving the purchase or sale of prepaid cellular telephones, calling cards with preloaded set dollar amounts for minutes or units of air time, the recharging of such a calling card, or the recharging of a prepaid cellular phone itself with additional minutes or units of air time. The retailer will collect the service charge from the purchaser at the time of the retail transaction. It is effective January 1, 2017. This is an example of the law eventually catching up with technology as well as new and innovative business models.
Alcohol & Tobacco
- Alcoholic Beverages: 2016 S.B. 11 amends the definition of alcoholic beverage to include powder or crystal. This new legislation also permits small farm wineries to manufacture brandy, fortified wine, and other products. Under the law, to be considered a small farm winery, the winery must produce no more than 100,000 gallons per year of wine, an amount that has increased from the previous 50,000 gallons per year. Likewise, the law increases the permitted production of a microbrewery from 25,000 barrels to 50,000 barrels. The law also makes it legal for a distiller, rectifier, winery, small farm winery, brewer, microbrewery, wholesaler, distributor, or retailer to donate alcoholic beverages to a charitable organization that possesses a special temporary alcoholic beverage auction license.
- Tobacco Products: 2016 H.B. 83 carves out a tax exemption for “reference tobacco products,” which are tobacco products, including cigarettes, that are made by a manufacturer specifically for use by colleges and universities in conducting tobacco health-related research or other experiments. Reference tobacco products must be marked as such and cannot be sold to customers, but they are not subject to cigarette or tobacco product taxes.
- A New “Blue Ribbon” Commission? Governor Bevin has promised to assemble a team to review the possibility of tax reform after the conclusion of the 2016 legislative session. This is not the first time tax reform has been considered in Kentucky; in 2012, Governor Steve Beshear put together a Blue Ribbon Tax Commission which presented a plan to modernize Kentucky’s tax code. However, legislators chose not to put the plan in motion, although some ideas were adopted in a piecemeal fashion.
- Governor’s Veto Message Portends Tax Reform: Governor Bevin appeared hesitant to adopt any tax credits without comprehensive tax reform. He vetoed H.B. 19, which provided for a tax credit for organ and bone marrow donation. In his veto message, Governor Bevin explained that in his view, the costs of the bill outweighed its benefits, and that given Kentucky’s financial climate, new tax credits were not advisable. He also said that “[a]s with numerous other proposed tax changes by the 2016 General Assembly, the tax credit proposed by House Bill 19 would be appropriate for debate and potential inclusion in a comprehensive tax reform proposal.”