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Proposed Bill Portends Possible Elimination of Income Tax and Expansion of Sales Tax

04.29.2009

There have been reports that Kentucky Governor Steve Beshear may call a Special Session in May or June, and that some sort of tax reform may be on the agenda. House Bill 51 (“HB 51”), introduced during the Regular Session of the 2009 General Assembly, could provide one basis for a public conversation about how Kentucky’s tax structure may potentially look in the future. HB 51 proposed: a broad expansion of the Kentucky sales tax base; a reduction in the sales tax rate from six percent (6%) to five percent (5%); and the elimination of the individual, corporation, and limited liability entity taxes.

One significant way in which the sales tax base would have been broadened under HB 51 would be the imposition of sales tax on commercial leases and a long list of services defined by reference to the North American Industry Classification System (“NAICS”) including: real estate agent and broker services; advertising and marketing services; document preparation; translation; and photography services, to name a few. Also, HB 51 would have imposed sales tax on labor related to the purchase of tangible personal property and on tangible personal property leased with an operator. It would have also imposed sales tax on rentals and leases of commercial real estate.

HB 51 would have also repealed many exemptions that have been long time staples of the sales tax. For example, it would have repealed the exemptions for: occasional sales and sales of water and fuel to Kentucky residents. It would seem that the repeal of the occasional sale exemption would be particularly burdensome to businesses contemplating a merger.

Several important manufacturing-related exemptions would have been repealed. HB 51 would have repealed exemptions for: energy or energy producing fuel used in manufacturing in excess of three percent (3%) of the cost of production; property certified as an alcohol production facility; property certified as a fluidized bed energy production facility; and, machinery for new and expanded industry.

Non-profits would have been impacted as well. The Bill would have amended KRS 139.495, which exempts all resident non-profit organizations from sales tax in regard to purchases to be used for its exempt purposes, food sold to students, and other sales by educational organizations except for athletic events. HB 51 would have limited this exemption to resident non-profit educational organizations exempt under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (“Code”). It would have also eliminated the exemption for out-of-state non-profit organizations.

In addition, the purchase of educational materials, such as textbooks for use at a non-profit educational facility, would be exempt only if the organization were exempt under Section 501(c)(3) of the Code. Moreover, HB 51 would have limited the refund of twenty-five percent (25%) of sales tax on the sale of donated goods by a non-profit entity to resident charitable institutions. And, KRS 139.492 would have been amended to repeal the exemption for sales of materials to a non-profit entity for historic preservation purposes.

Even certain local governments would have lost their sales tax exemption. The Bill would have narrowed the current tax exemption granted to all governmental agencies or units by limiting it to only state or constitutional agencies. Thus, currently exempt sales to municipalities and local government agencies and units would have become taxable.

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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