The tax reform package passed by the Kentucky legislature earlier this year contains some 400 pages of changes that will impact what individuals and corporations pay in state income taxes.
It also requires a range of businesses, nonprofit organizations, and even the neighborhood kid who mows your lawn to collect the sales tax on goods and services for the first time.
To make sense of all of these changes, KET convened a panel of state revenue officials to explain key aspects of the new tax law and answer viewer questions. The guests were Kentucky Department of Revenue Commissioner Daniel Bork; Richard Dobson, executive director of the Office of Sales and Excise Tax; and Jessica Honican, director of the Division of Corporation Tax.
Individual Income Taxes
The old tax brackets have been replaced with a single 5 percent tax rate for individual taxpayers. To offset the flat tax rate, lawmakers eliminated a number of individual deductions, including those for health insurance premiums, long-term care insurance coverage, and medical expenses. Jessica Honican says the biggest deductions that remain are for home mortgage interest and charitable contributions.
The new law reduces the pension income exclusion from $41,100 to $31,100. However Honican says state and local government retirees who earned their pensions prior to Jan. 1, 1998 can still exempt the full amount of their pension benefits. She also says Social Security earnings remain fully exempt for Kentucky tax purposes.
Corporation Income Taxes
The old corporate tax brackets have also been replaced and now businesses will have a flat tax rate of 5 percent.
Companies will use a new apportionment formula to determine how of much of their income is subject to Kentucky tax. Honican says the previous formula was based on three factors: the number of people a business employed in the commonwealth, the property it owned in the state, and sales conducted within the state. Now she says it will be based solely on Kentucky sales.
Market-based sourcing rules will now apply to those receipts. Honican says sales will be sourced to Kentucky or to other states based on where the market for the product or service is.
Changes to Sales Taxes
Perhaps the most confusing aspect of the new law is figuring out exactly what goods and services are subject to the state’s 6 percent sales tax for the first time.
Here’s an overview of those things to which the sales tax now applies.
Tickets to fundraisers, cultural performances, and charity events put on by nonprofit organizations.
Richard Dobson says the tax applies to the full amount of the ticket price required to gain admission to the event. (Whether that full amount can be claimed as a charitable contribution is a separate issue, he says).
Dobson says businesses or individuals that sponsor a charitable event would have to pay sales tax on the sponsorship if it includes tickets or admission to the event. If the sponsor only receives name recognition or some other promotional consideration, the sales tax would not apply.
Nonprofits will also have to collect sales taxes on the amount paid to win an item in a silent auction (the sales tax will not be based on the value of the item), as well as other items like t-shirts or tote bags sold by the organization. However, Dobson says small nonprofits that have less than $1,000 in annual ticket or other sales are excluded from having to collect the sales tax.
This change is actually the result of a Kentucky Supreme Court decision from earlier this year. Dobson says the court ruled that nonprofits in the commonwealth are only exempt from property taxes. They do have to pay sales and use taxes, according to the court.
Initiation fees, membership dues, monthly or annual fees, or single-use fees charged to access golf courses, fitness centers, health spas, swimming and tennis clubs, campsites and RV parks, bowling alleys, and similar recreational venues.
Pet care services, including grooming, training, and pet sitting. Also small animal veterinary services, including spay and neuter services, and adoption fees charged by municipal shelters, rescue groups, or other animal welfare organizations Dobson says an animal adoption is essentially a retail transaction for tangible property, so it should be subject to the sales tax.
Landscaping and lawn maintenance services Commissioner Bork says the new law does not provide any exemption for the size of the business, so technically a teenager who works during the summer cutting neighbors’ yards should collect sales tax and remit it to the state. Dobson says he expects future legislative sessions to add clarifying language to address that issue.
Dry cleaning and upholstery services
Labor on car repairs when parts are sold with the service work
Extended service warranties for tangible personal property or digital property
If your business or organization has not previously collected state sales taxes, you will need to register for a sales and use tax account with the commonwealth.
Items Excluded from the Sales Tax
Admission to events held by nonprofit organizations that have an educational or training purpose, such as art classes or church camps, as well as events held by primary and secondary schools. College scholarships will also not be subject to the sales tax.
Tailor and clothing alteration services, even if performed by a dry cleaner
Equine and livestock veterinary services
Installation and repair of fixtures to real property, such as heating-cooling units, water heaters, plumbing fixtures, or deck repair and cleaning
Prescription medications as well as psychologists and counseling services, hairdressers, barbers and cosmetology services
Parking fees, vehicle towing services, and car washes
Homeowner association memberships. Also property rental fees and sales of land
Other Important Changes
Lawmakers raised the tax on cigarettes from 60 cents to $1.10 per pack. Dobson says the increase only applies to traditional smokes, not to e-cigarettes or other tobacco products. While the tax is paid at the wholesale level, Dobson says the increase ultimately will be reflected in the price consumers pay.
Retail stores that already had cigarettes in stock when the new law took effect are required to pay a floor stock tax on that inventory. Retailers are required to submit a report on July 10 that lists their supplies of cigarettes as of June 30. Dobson says store owners can either pay the full floor stock tax due on that inventory on July 10, or they can make their payment in three installments in July, August, and September. The floor stock tax on packs of 20 cigarettes is 50 cents.
Many online retailers located out of state will now have to collect sales taxes on purchases made by Kentuckians. Previously retailers that did not have a physical presence or employees in a state were not required to collect sales taxes on online sales made to residents of that state. But recent U.S. Supreme Court rulings changed that. Bork says websites that collect $100,000 or more in revenues from Kentucky or have 200 or more sales transactions in the commonwealth are now required to collect the sales tax.
Kentucky businesses that have online sales should also make sure they are paying sales taxes owed to other states. Bork says Kentucky is part of the Streamlined Sales Tax Governing Board, which is a compact among 24 states to facilitate the administration and collection of sales taxes. Bork says when business owners register with the board, they are automatically registered in each of those compact states.
Have More Questions?
The commissioner urges people to visit tax answers.ky.gov to learn more about the changes. Kentuckians can also use the website to email the revenue cabinet with specific questions. Bork says his staff usually response within two business days.
Businesses that need additional information about registering to collect and remit sales taxes can visit the online portal onestop.ky.gov
Bork and Dobson say state revenue officials are continuing to sort through some of the details about the tax changes, and further clarifications could be forthcoming. For example, they are meeting this week with charitable organizations to discuss impacts to bingo and other games of chance.