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Kentucky Department of Revenue Proposed Amendments to Watercraft Allocation Regulation


The Kentucky Department of Revenue (“Department”) recently proposed an amendment to Administrative Regulation 103 KAR 8:010, titled “Watercraft Allocation” (“Regulation”), to allow for alternative apportionment of the Kentucky Commercial Watercraft Tax (“Watercraft Tax”).

The Regulation pertains to the “new” Watercraft Tax, which was enacted by the 2006 General Assembly and is now codified at KRS 136.1801 to 136.1806, effective January 1, 2008, replacing a prior tax scheme. The Watercraft Tax is a centrally assessed state and local ad valorem tangible personal property tax on the value of commercial watercraft imposed at a state rate of $0.45 per $100 and at an aggregate local rate (which varies by local taxing jurisdiction) that apportions the value of watercraft based on “route miles” – specifically, the ratio of the length of waterway routes in Kentucky to the length of waterway routes of the involved taxpayer in all states – and not by using actual miles traveled. The “old” tax used actual miles.

The proposed amendment to 103 KAR 8:010 would add a new section to provide the following: “Apportionment. If the apportionment factor set forth in KRS 136.1802(4) does not fairly represent the extent of the corporation’s watercraft activity in Kentucky, the corporation may petition for, or the Department may require, any other method to fairly represent an equitable apportionment of the corporation’s watercraft to Kentucky.”

The Department’s proposed amendment is in response to assertions from numerous taxpayers that the Watercraft Tax violates the Commerce Clause of the United States Constitution – both on its face and as applied. The proposed amendment would specifically authorize the use of a method other than route miles (e.g., actual miles) to fairly represent an equitable apportionment of watercraft to Kentucky and would provide the Department with a mechanism to facilitate the administration and application of the tax in accordance with federal constitutional constraints.

A hearing regarding the Regulation is scheduled before the Administrative Review Subcommittee on October 11, 2011.

If you have questions about this topic or any other legal issue, please contact any member of the firm's State and Local Tax Team.

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