Kentucky Broadens Sales Tax Base, Hikes Cigarette Tax, Makes Other Changes

The Kentucky Legislature overrode Gov. Matt Bevin’s veto of a tax bill affecting sales and use tax, cigarette tax, property tax, and more. Provisions affecting income tax are reported separately. (TAXDAY, 2018/04/17, S.5) Developing details of the bill were previously reported. (TAXDAY, 2018/04/03, S.13; TAXDAY, 2018/04/11, S.15)

Sales & Use Tax

These sales and use tax changes apply to transactions from July 1, 2018, forward, unless otherwise noted:

Broadening of Sales Tax Base

The bill broadens the sales tax base by applying sales tax to the following services/service charges:

– landscaping services, like lawn care, tree trimming, landscape design, and snow plowing;

– janitorial services, like residential and commercial cleaning, and carpet, upholstery, and window cleaning;

– small animal veterinary services, but not for equine, cattle, swine, sheep, goats, llamas, alpacas, ratite birds, buffalo, or cervids;

– pet care services, like grooming and boarding, pet sitting, and pet obedience training;

– industrial laundry services, like industrial uniform supply, protective apparel supply, and industrial mat and rug supply services;

– non-coin-operated laundry and dry cleaning services;

– linen supply services, like table and bed linen supply services and nonindustrial uniform supply services;

– indoor skin tanning services, like tanning booth or tanning bed services and spray tanning services;

– non-medical diet and weight reducing services;

– limousine services (when a driver is provided);

– charges for installing or applying tangible personal property (tpp), digital property, or services sold. These charges are added to the definition of “gross receipts” and “sales price.” The definition no longer excludes these charges if separately stated;

– charges for short-term lodging offered to transients by campsites, campgrounds, and recreational parks; and

– extended warranty services.

Extended Warranty Services

In addition to applying tax to “extended warranty services” (above), the bill:

– defines the term as services provided through a service contract agreement between the contract provider and the purchaser where the purchaser (1) agrees to pay for the contract, and (2) the provider agrees to repair, replace, support, or maintain tangible personal tpp or digital property under the contract if: (1) the contract is sold on or after July 1, 2018; and (2) the underlying property is subject to sales tax or motor vehicle usage tax;

– revises the sales tax code to change references from “tangible personal property or digital property” to “tangible personal property, digital property, or an extended warranty service;”

– extends registration requirements to those who sell extended warranty services; and

– expands “retailer engaged in business in this state” to include retailers if they (or those acting for them) engage in in-state activities involving extended warranty service. Such activities include soliciting orders, selling, delivering, and taking orders.

Sales & Use Tax Incentives

The following changes are made concerning sales and use tax incentives:

– An exemption for property which has been certified as a pollution control facility is removed.

– The alternative energy fuel credit to build or retrofit a production facility for energy-efficient alternative fuels is repealed.

– From April 13, 2018, and until July 1, 2022, the KDOR will not accept new applications for the motion picture refundable credit.

Marketplace Sales Provisions

Marketplace sales definitions are added to Kentucky sales and use tax law as follows:

– “Marketplace” means any physical or electronic means through which at least one retailer can advertise and sell or lease tpp or digital property. This definition applies regardless of whether the property or retailer is physically present in Kentucky.

– “Marketplace facilitator” means a person that facilitates the retail sale of tpp or digital property (1) by listing or advertising it for retail sale, and (2) either directly (or indirectly through third parties) collects the purchaser’s payment and transmits it to the seller.

– “Marketplace retailer” means a person who (1) has an agreement with a marketplace facilitator, and (2) makes retail sales of tpp or digital property through a marketplace.

– “Referrer” means a person that (1) contracts with a retailer or retailer’s representative to advertise or list tpp or digital property for sale or lease; (2) makes referrals by connecting a person to the retailer or representative, but does not act as a marketplace facilitator; and (3) received in the prior or current calendar year at least $10,000 in consideration in the aggregate from remote retailers, marketplace retailers (or their representatives) for referrals on retail sales to Kentucky purchasers.

– “Remote retailer” means a retailer with no physical presence in Kentucky. It does not include a referrer or marketplace facilitator.

“Retailer engaged in business in this state”

The definition of “retailer engaged in business in this state” is expanded to reflect in-state extended warranty service activities (see above). The definition is also expanded to include remote retailers selling tpp or digital property delivered or transferred electronically to a Kentucky purchaser if:

– they sold such property to a Kentucky purchaser in at least 200 separate transactions in the previous or current calendar year; or

– their gross receipts from the sale of such property to Kentucky purchasers in that period exceeds $100,000.

Other Sales & Use Tax Provisions

The bill also:

– extends to taxable services the prohibition against advertising the absorption of sales tax;

– adds a presumption that a taxable service is taxable unless the person takes from the purchaser an exemption certificate; and

– defines “admissions” as fees paid for: (1) the right of entrance to a display, program, sporting event, music concert, performance, play, show, movie, exhibit, fair, or other entertainment or amusement event or venue; and (2) the privilege of using facilities or participating in an event or activity.

Cigarette Tax

The bill expressly excludes electronic cigarettes from the definition of “cigarettes.” Also, effective for cigarette and electronic cigarette sales from July 1, 2018, forward, it:

– increases the 56¢ surtax per pack of 20 cigarettes by 50¢ to $1.06 and stipulates that it can only be paid once;

– reduces the surtax and the 3¢ tax/20 cigarettes by 50% for products for which a modified risk tobacco product order is issued under 21 U.S.C. §387k(g)(1); and

– reduces the surtax and the 3¢ tax/20 cigarettes by 25% for products for which a modified risk tobacco product order is issued under 21 U.S.C. §387k(g)(2).

Any person subject to the surtax and the 3¢ tax must:

– report to the KDOR that an application related to a modified risk tobacco product has been filed within thirty 30 days of the filing; and

– report to the KDOR that an order authorizing the marketing of a modified risk tobacco product has been received.

On the first day of the calendar month after the end of 45 days following receipt of this information, the KDOR will reduce the tax imposed on the modified risk tobacco product.

Finally, retailers, sub-jobbers, resident wholesalers, nonresident wholesalers, and unclassified acquirers must:

– at 11:59 p.m. on June 30, 2018, take an inventory of their (1) packaged cigarettes bearing Kentucky tax stamps, and (2) unaffixed Kentucky cigarette tax stamps;

– file a return by July 10, 2018, showing this inventory; and

– on the inventory, pay a floor stock tax of 50¢/20-package of cigarettes bearing tax stamps and on unaffixed Kentucky tax stamps. This tax is due in three installments in 2018: July 10, August 10, and September 10.

License Fees in Counties of 30,000 or More

These changes apply to FY July 1, 2018, through June 30, 2019, and FY July 19, 2019, through June 30, 2020. They expire at the end of June 30, 2020. They concern license fee levies by:

– counties of 30,000 or more that levied a license fee that was in effect on April 13, 2018; and

– cities (within such counties) that have levied but not collected a license fee as of April 13, 2018.

With respect to the tax rate imposed by such counties within the corporate limits of a city, and the credit for city license fees against county license fees:

– From July 1, 2016, through June 30, 2017 (previously, July 1, 2014, through June 30, 2015), the credit applies only to the first 0.10% of the tax rate; and

– From July 1, 2017, through June 30, 2018 (previously, July 1, 2015, through June 30, 2016), the credit applies only to the first 0.20% of the tax rate.

These changes do not apply to a city and county unless both have levied and are collecting license fees on April 13, 2018. Any set-off or credit of city fees against county fees between a city and county as of that date remains in effect.

Finally, a county can increase the occupational license fee rate over what was imposed when its population grew over 30,000 if it has:

– enacted an occupational license fee at a rate above 1% before reaching a population of 30,000;

– an agreement with its largest city to share revenues from the fee; and

– agreed with its largest city to approve the increase and revenue distribution.

Other cities within the county can also be parties to the agreement if all parties agree.

Motor Vehicles

Changes are made concerning assessments on motor vehicles purchased before January 1 that are registered after January 1 through no fault of the owner. The due date is extended from 45 days to 60 days from the date of notice for property taxes on the vehicle for which the month of registration has passed.

Changes are made concerning the corporation and utility tax assessment of trucks, tractors, trailers, semitrailers, and buses operating partly outside the state. Taxpayers who have been assessed by the KDOR have 60 days (previously, 45 days) from the notice date of the tentative assessment to protest. The due date for the state and local taxes is similarly increased from 45 days to 60 days from the notice date.

New Tire Fee

With respect to the new tire fee, the bill:

– extends it past June 30, 2018, to July 1, 2020;

– increases it from $1 to $2 per new tire;

– subjects it to sales tax;

– allows dealers to pass it along to customers; and

– allows dealers to retain 5% of it if the amount due is not delinquent at the time of payment.

Practice & Procedure

Appeals to Circuit Court

The bill addresses parties appealing to a county circuit court a final order of the Kentucky Claims Commission or a county board of assessment appeals upholding an assessment. Collection of tax will be stayed by filing a petition or appeal to any court. In such a case, full payment of the tax or a supersedeas bond is not required.

Confidentiality of Taxpayer Information

Taxpayers who the KDOR may be entitled to publish as delinquent must have taxes or fees that remain unpaid for 60 days (previously, 45 days).

The bill also applies the prohibition against disclosure of confidential taxpayer information to:

– statistics of gasoline and special fuels gallonage reported to the KDOR for gasoline and special fuels tax purposes; and

– utility gross receipts license tax return information necessary to administer this tax in relation to school districts on a confidential basis.

The prohibition also is applied to providing information to the Legislative Research Commission related to (1) the sales and use tax refund on building disaster recovery materials, and (2) these income tax credits and incentives:

– the energy efficiency products credit;

– the ENERGY STAR home and the ENERGY STAR manufactured home credits;

– the film industry incentives;

– the Kentucky revitalization tax credits and the job assessment fees;

– the Kentucky investment fund;

– the angel investor tax credit;

– the distilled spirits credit; and

– the business inventory credit enacted by the bill.

Service Contracts

The bill prohibits certain contracts and arrangements if any part of the compensation or payable benefit is contingent on (or related to) certain amounts. These amounts are the amount of tax, interest, fee, or penalty assessed against or collected from the taxpayer. The prohibition applies to contracts and arrangements entered into:

– for examining a taxpayer’s books and records;

– for collecting a tax from a taxpayer; or

– for legal representation of the KDOR.

Such contracts and arrangements are void and unenforceable.

Unprotested Assessments

The time for the payment of unprotested assessments is increased to 60 days for assessments issued from July 1, 2018, forward. Prior to that date, a taxpayer has 45 days to pay an assessment for which it receives a notice from the KDOR and does not protest in writing.

Railroad Property

Corporation and utility tax provisions are amended to extend the due date for state and local taxes on railroad carline property. The date is extended from 45 days to 60 days from the notice date.

Watercraft

Corporation and utility tax provisions are amended to extend the due date for state and local district taxes on watercraft. The date is extended from 45 days to 60 days from the notice date. Corporation have 60 days (previously, 45 days) from the date of the KDOR’s notice of assessment to protest.

H.B. 366, Laws 2018, effective April 13, 2018, and applicable as noted
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