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May 28, 2019 9:50am


After Kentucky made the most sweeping changes to its tax code in nearly a century last year by passing H.B. 366 and H.B. 487 (see my prior article for more on this here), 2019 was sold as only requiring “cleanup” tax legislation to fix some of these changes.  However, as is often the case in Frankfort, several unexpected and important tax provisions were debated and ultimately enacted during the 2019 Regular Session through H.B. 354, and on the very last day, by H.B. 458.  Many of these changes are critical to the business community, including updates to the new mandatory combined/unitary reporting structure.

Promises Kept: Needed Cleanup Provisions Enacted

One of the biggest unintended consequences of the 2018 tax reform was the extension of sales tax to nonprofits, but the General Assembly made good on its promise to exempt admissions and fundraising event sales by most nonprofit organizations, other than sales by nonprofits in the retail industry (e.g., thrift stores).

Other promised changes were also kept, such as extending the sale for resale exemption to services first made subject to sales tax in 2018 (as such exemption previously only included resales of tangible property), and adding a $6,000 minimum threshold before certain services are subject to sales tax (e.g., to protect the high school summer grasscutter).  The General Assembly also allowed back itemized income tax deductions for investment interest and gambling losses, which were eliminated in 2018.

New Corporate Changes: Unitary Reporting Gets a Makeover and More

Some in the business community hoped for a wholesale repeal of mandatory combined reporting enacted last year in H.B. 487.  Such efforts fell short in 2019, but several pro-business changes were made by H.B. 354 to make it more tolerable, including clarifying that a combined group includes only corporations more than 50% owned by a common owner, updating the “tax haven” definition to exclude countries with tax treaties to be more in align with other unitary states, and confirming so-called water-edge limitations, elimination of intercompany transactions from net income/receipts and that NOLs may be shared by the unitary group.  H.B. 354 also shortened the required election period from eight (8) years to four (4) years if a corporate taxpayer elects to file consolidated returns, instead of unitary.  Additionally, Kentucky added a new deferred tax deduction for publicly traded companies in H.B. 458 to help offset the effects of combined reporting for financial statement reporting purposes beginning in 2024.

The banking community got a victory as the antiquated bank franchise tax was repealed, with banks transitioning to Kentucky’s lower corporate income tax on January 1, 2021, although financial institutions are still subject to local franchise taxes.  Netflix and other video-streamed content providers, however, were dealt a loss as they are now statutorily subject to Kentucky’s telecommunications tax along with all other multichannel video programming providers.

In the sales tax world, Kentucky added some teeth to the online “marketplace provider” provisions enacted in 2018, by greatly expanding the definition for these marketplace providers/facilitators (e.g., Amazon, eBay, Etsy, Walmart) and requiring same to collect and remit sales tax on certain sales made on its online platforms by out-of-state third-party sellers – a trend which at least 30 states have likewise enacted or have tried to enact over the past year.

As was the case in 2018, new provisions directly effecting manufactures continued in 2019 including the reopening of the energy exemption for “toller”/fee processor arrangements (after 2018 removed same).  The General Assembly also made important changes to Kentucky’s already generous recycling income tax credit by lowering the job thresholds for “major recycling projects” from 750 to 400 to attract manufacturers/recyclers to locate and expand in the Commonwealth.

After the 2018 tax reform package included several provisions to protect taxpayer rights, this good work was almost completely undone by a last minute addition to H.B. 354, which prohibited the Department from releasing tax guidance via an open records request (e.g., final rulings, private letter rulings, and alternative apportionment requests) despite the Kentucky Supreme Court recently permitting same in a case where our firm represented the taxpayer.[1]  Luckily, once the effect of these changes became known by legislators (who stated on the record that they were unaware of them), such limitations were repealed via H.B. 458 to restore taxpayer transparency.

Not Done Yet:  2020 Likely to Include New State and Local Tax Reform Efforts 

There is always potential for additional state tax-related changes in 2020, including increased pressure to allow expanded/sports gaming.  One must also continue to monitor new guidance issued by the Department as a result of the 2018 and 2019 tax reform as it has already begun to do in the form of regulations and other administrative guidance (see my prior articles on same here).

But more likely, and more significant, is that local tax reform may start to heat-up in 2020 as many supporters are hoping to completely revamp the local government tax structure, including repealing or modifying the outdated limitations to local property tax revenue put in place some forty years ago by 1979 H.B. 44, and amending Section 181 of the Kentucky Constitution to permit new revenue sources such as a local sales tax, expansion of restaurant tax, etc.  Throw in national and state level elections, and 2020 should be another exciting and unpredictable year here in the Bluegrass State.  Stay tuned for more.

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Attorneys at Frost Brown Todd continue to closely monitor Kentucky’s recent tax reform efforts and its effects on businesses. Should you have questions or would like additional information about these changes, contact Daniel Mudd or visit FBT’s Tax Blog dedicated to keeping you informed on all things tax at www.taxlawdefinedblog.com.

[1] See Dep’t of Revenue v. Sommer; No. 2015-CA-001128-MR (Ky. App. 2019) (to be published), aff’d 2017-SC-000071 (Ky. Nov. 1, 2018), motion to reconsider denied (Ky. Apr. 18, 2019).