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March 5, 2020 11:06am

Make it easier for contractors to do business with tax-exempt customers

Churches, schools, nonprofits, and state and local government agencies are important customers for contractors in the Commonwealth. Unfortunately, Kentucky law imposes an anti-business and unnecessary administrative burden on contractors who do business with these types of organizations. The 2020 legislative session offers lawmakers in Frankfort an opportunity to address the problem.

Current Kentucky law requires tax-exempt entities – like churches, schools, and nonprofits – to purchase materials for their construction projects directly in order for them to claim their exemption from the state sales tax. For many projects, this results in an unnecessary and costly administrative burden for both the contractor and the customer. It requires the tax-exempt customer to establish new accounts with new suppliers, review and approve multiple invoices, and ultimately take time away from its core mission. At the same time, it requires the contractor to track invoices and manage multiple supplier accounts, effectively forcing the contractor to play the role of a middleman in addition to running their business and ensuring the fulfillment of their contract. Many contractors in Kentucky have found it necessary to hire staff just to deal with this one administrative issue.

In other states, this process is much simpler. The exempt status of the tax-exempt organization is allowed to pass through to the contractor for the purposes of the project. This is the case, for example, in IndianaOhio, Missouri, and Texas.

Two bills have been filed in Frankfort that would follow the lead of these states and allow the tax-exempt status of an exempt customer to pass through to the contractor for purchasing construction materials: Senate Bill 95, sponsored by Senator Chris McDaniel, and House Bill 193, sponsored by Representative James Tipton. These bills do not create a new tax exemption. Instead, they would streamline access to an already-existing exemption by removing an anti-business and unnecessary administrative burden for contractors and tax-exempt entities like churches, schools, and nonprofits. The Senate supported near-identical bills to these in the 2018 and 2019 sessions.

GLI will be actively working in the 2020 session to make it easier for contractors to do business with nonprofits by allowing the tax-exempt status of their exempt customers to pass through to them when it comes to purchasing materials for projects.