Kentucky’s Top 10 Biggest Tax Developments in 2018
2018 has seen quite a few significant tax developments. Following are some of the ten biggest.
Broad Expansion of the Sales Tax to Many Services and More
Historically, since 1960, Kentucky sales tax which broadly applies to sales of tangible personal property, unless otherwise exempt, has applied to only a few select services. But, when the Kentucky General Assembly enacted 2018 House Bill 487, the legislature extended the sales tax, effective July 1, 2018, to apply to landscaping services, veterinarian services for small animals, janitorial services, fitness and recreational sports centers, industrial laundry services, dry cleaning and laundry services, linen supply, limousine services, and other services. Sales tax was also extended to initiation fees, membership dues, monthly or annual fees, or single-use fees charged to access golf courses, gymnasiums, spas, swimming clubs, and other venues. The application of sales tax on admissions was expanded to events that include fundraisers or charity events put on by nonprofit organizations, unless there is an educational component. Sales tax was also extended to apply to certain types of labor and services associated with the repair, installation, and maintenance related to the sale of taxable tangible personal property (with an exemption for manufacturers and industrial processors).
This broad expansion caused quite a bit of consternation among service providers, who were scrambling to come into compliance prior to the July 1 implementation date.
Did the pendulum swing too far? Look for bills in 2019 that dial back the sales tax on amounts paid to non-profits and also to clearly apply the resale exemption to services purchased for resale.
Reporting income on a combined unitary basis had been legislatively prohibited in Kentucky since the enactment of legislation in the wake of GTE v. Revenue Cabinet, 889 S.W.2d 788 (Ky. 1994), which held that corporations had a right to file on a combined unitary basis. But, effective for tax years beginning on or after January 1, 2019, a corporate taxpayer doing business in the Commonwealth that is a member of a unitary group will be required to determine its corporation income tax using the unitary combined reporting method, unless the corporate group makes an election to file consolidated with its federal affiliated group. Significantly, a coalition of taxpayers and taxpayer groups are challenging mandatory unitary combined reporting. So, look for a potential change in 2019.
Wayfair Legislation Requiring Remote Sellers to Collect Kentucky Sales Tax
Depending on your perspective, this legislation is either way fair or way unfair. On June 21, 2018, the U.S. Supreme Court issued its landmark opinion in South Dakota v. Wayfair, Inc., et al., 138 S.Ct. 2080 (2018) impacting every state’s sales and use tax regime. Kentucky responded to Wayfair by enacting economic nexus legislation mirroring the South Dakota law by requiring remote retailers to collect sales and use tax if, in the previous or current calendar year, their gross receipts from Kentucky sales exceeded $100,000 or they had 200 or more separate in-state sales transactions. Though the legislation was effective on July 1, 2018, the Kentucky Department of Revenue began requiring remote sellers to collect Kentucky sales tax beginning October 1, 2018.
Tax Cuts and Jobs Act Conformity
The Tax Cuts and Jobs Act of 2017 put in place the most massive revisions to the Internal Revenue Code, since 1986. Kentucky’s historical lag in conforming to the Code notwithstanding, the Code reference date was updated in 2018 to conform to the Tax Cuts and Jobs Act of 2017, with certain exceptions, e.g., 100% depreciation deduction, Section 179 expensing, and the 20% Qualified Business Income deduction.
Single Sales Factor and Market Based Sourcing Enacted
Kentucky-based companies, especially manufacturers, have sought a change in Kentucky’s income tax apportionment formula to a single sales factor, eliminating the property factor and the payroll factor. In 2018, the General Assembly adopted a single-factor apportionment formula with market-based sourcing of receipts, joining many of Kentucky’s sister states and conforming to the national trend.
Nonprofit Constitutional Exemption Gutted
The Kentucky Supreme Court held in Dep’t of Revenue v. Interstate Gas Supply, Inc., 2016-SC-000281-DG (March 22, 2018) that the exemption of Section 170 which exempts from taxation all institutions of “purely public charity” applies only to property taxes. In so holding, the Court overruled Commonwealth ex. rel. Luckett v. City of Elizabethtown, 435 S.W.2d 78 (Ky. 1968), which had held that the use tax was in effect a property tax, thus bringing use tax on nonprofits within the scope of Section 170 – but, no more.
More Guidance for Taxpayers
In 2018, KDOR has been issuing guidance in various forms. KDOR’s web page, TaxAnswers.ky.gov, provides quite a few answers to many questions arising from the 2018 Kentucky Tax Reform legislation. In addition, KDOR has been issuing guidance in the form of (1) Technical Advice Memorandums; (2) Revenue Procedures; (3) Private Letter Rulings; and (4) General Information Letters, which were provided for by Kentucky Revenue Procedure KY-RP-17-01 issued on November 22, 2017. KDOR has also been updating regulations and issuing new regulations to address the changes effected by the Kentucky Tax Reform bill enacted in 2018. Breaking the practice of not updated or issuing regulations which began in 2007, this new trend began with the Governor’s Red Tape Reduction Initiative (RedTapeReduction.com) aimed at addressing outdated, unnecessary or overly complex regulations and continued in 2017 with the enactment of KRS 13A.3102 which provides that administrative regulations will automatically expire every seven years without further action by the issuing agency. Updated regulations help KDOR administer and taxpayers comply with Kentucky taxes.
More Taxpayer Protections
The General Assembly, as a part of its tax reform legislation, made several important changes: extending the time to protest a tax assessment to 60 days, up from 45 days; extend the time to report federal tax changes to 90 days, up from 30 days; eliminated the “pay-to-play” bond required to appeal a tax assessment; and, prohibited contingency fee contracts for tax collection between KDOR and third parties. All of these changes were sought by the KyCPA. What a great year for Kentucky taxpayers’ rights!
Increased Property Tax Appeals
For a state with low property taxes, Kentucky has seen more than its fair share of property tax litigation. Although the Kentucky Supreme Court declined to hear Grand Lodge of Kentucky Free and Accepted Masons, et al. v. City of Taylor Mill et al., 2015-CA-001617-MR (Ky. App. 2017), discretionary review denied, 2017-SC-000122 (Ky. 2018). The Grand Lodge case was just one of many property tax appeals pending in the courts.
Opportunity Zones in Kentucky Established
The Governor established certain low-income census tracts as Opportunity Zones pursuant to the Tax Cuts and Jobs Act of 2017, investments in which much be made through a qualified opportunity fund and must meet certain criteria. Capital gains on qualified reinvestments may be deferred, and gains on sales of these investments is exempt from tax after a ten year holding period. This is a great “opportunity”.
More to Come in 2019
2018 seems like it has gone by pretty fast, but now is a good time to stop and take a look at all the big things that went on. More to come in 2019.