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Kentucky’s Tax Efforts in an Unusual Legislative Session

Posted on June 1, 2020
Rachael H. Chamberlain
Rachael H. Chamberlain

Rachael H. Chamberlain is a managing associate in the Lexington, Kentucky, office of Frost Brown Todd LLC and practices in the areas of state, local, and federal taxation and tax controversy and litigation. She can be reached at rchamberlain @fbtlaw.com.

In this installment of SALT From the Bluegrass State, Chamberlain reviews Kentucky’s COVID-19 relief efforts and other tax changes from the 2020 legislative session.

The author thanks Elizabeth Mosley for her assistance with this article.

Copyright 2020 Rachael H. Chamberlain.
All rights reserved.

After two years of significant tax reform and related cleanup work, Kentucky’s 2020 General Assembly regular session began in January with only a few major tax initiatives under consideration. After initial drama regarding potential amendments to the state constitution, the COVID-19 pandemic hit. While the General Assembly did not adjourn early as requested by Gov. Andy Beshear (D), it limited its session and spent much of its remaining time focusing on passing a short-term budget and coronavirus relief measures. Nonetheless, several tax matters were addressed during the session. This article provides an overview of these changes.

An Uncertain Future for Constitutional Reform

Before the pandemic, one of the most important tax issues to be taken up by the General Assembly was a possible constitutional amendment. H.B. 475 proposed expanding local taxing power in a way that would have opened the door for a local option sales tax — something not currently used in the commonwealth.

H.B. 475 was introduced at the end of February to amend section 181 of the Kentucky Constitution to grant the General Assembly the power to authorize any county, city, town, or other municipality to assess and collect local taxes, license fees, and franchise fees that are not otherwise in conflict with the constitution. The bill would have also removed a significant portion of the text of section 181, which would aid practitioners and local governments who find the language confusing and outdated. The bill would have authorized a ballot measure regarding the changes in November.

While the bill initially seemed likely to pass because of bipartisan support, it ultimately fell victim to politics. Kentucky Democrats, feeling largely neglected during the session because of a Republican supermajority, surprisingly voted against the bill — or failed to vote at all — in the first vote on March 6. This included several bill cosponsors. On March 9 the bill was reconsidered, and on March 17 it was recommitted to the Appropriations and Revenue Committee. With the increased focus on the pandemic, however, no further substantial action was taken regarding H.B.475.

The push for local option sales taxes has strengthened over the years, so with the growing need for funding to local governments, this bill may be more important next session. Local government revenue is suffering severely in response to the COVID-19 pandemic. It is anticipated that expansion of local governments’ power to both increase current tax rates and implement new forms of taxation will be not just be a topic of interest, but a topic of necessity. As a result, these changes may be more likely to pass in next year’s session.

Small Reforms Become Larger Than Expected

H.B. 351 was initially slated to contain many of the session’s other planned tax changes. As the session progressed, however, this “short” bill was expanded significantly. The original version included 24 pages, but by the time it was sent to the governor for signing, it contained 224 pages of tax changes. The original version primarily covered tobacco product tax expansion and other minor changes that were anticipated going into the session. However, many of them did not make it into the final version of the bill. Instead, the General Assembly adopted a wide variety of unexpected tax changes.

The final version of H.B. 351 added both minor and major tax-related provisions. Many of the minor changes involved removing outdated tax code provisions, such as old dates for the beginning of electronic return filing and making minor technical corrections or clarifications. H.B. 351 also changed provisions regarding the calculation of interest and the refund of estimated tax payments.1

The bill requires more transparency from local property value administrators and the Commonwealth. The Department of Revenue now must provide some information related to property taxes online in a format that makes the process much easier for the average taxpayer to understand.2 This information must be provided with every notice of assessment and property tax bill sent to taxpayers.

Several income tax changes were made by H.B. 351. Kentucky Revised Statutes (KRS) section 141.039 and section 141.900 were amended to remove the inclusion of income tax payments made by lessors to lessees under IRC section 110 from the gross income of the lessors, and to remove the related exclusion for the lessees.3 The bill also changed the term “combined group” to “affiliated group” for corporate income reporting to be more consistent with past income tax reform changes.4 The definition of consolidated return found in KRS 141.201(2)(b) was amended to remove references to the IRC — although these references remain elsewhere in the statute.5 Those changes will likely require future revisions to recent manuals released on this topic. H.B. 351 also conformed Kentucky to the new federal audit computations for partnership tax (which Beshear vetoed as discussed below).6

A major reform that was anticipated during the session was the creation of a new tax credit program to encourage farmers to sell to beginning farmers to help retain one of the state’s most important industries.7 These changes added new definitions and set forth the criteria for the credit, which is nonrefundable and nontransferable. There are multiple limits to the credit, including a $100,000 cap on the total credit over the lifetime of a selling farmer.

Other industries may also benefit from changes made under H.B. 351. The bill provided some wins for Kentucky’s bourbon and craft alcohol industries, such as expanding the biodiesel production tax credit to renewable chemical production (which Beshear had also vetoed), which could cover waste products from bourbon distilling and other processes.8 Although not an income tax change, H.B. 351 also clarified that Kentucky’s sales tax exemption for machinery in new and expanded industry includes machinery directly used for most distilleries, wineries, and breweries by amending KRS 139.010(19).9

KRS 139.010(22) was amended to modify the definition of marketplace provider to exclude a person who directly or indirectly charges, collects, or otherwise receives selling fees, listing fees, referral fees, closing fees, fees for inserting or making available tangible personal property, digital property, or services on a marketplace, or receives other consideration from the facilitation of a retail sale.10

In yet another boost for distillers and breweries, H.B. 351 amended KRS 139.470 to provide a sales tax exemption for gross receipts from the sale of tangible personal property to a manufacturer to be used in processing distilled spirits, wine, and malt beverages at designated locations.11 A similar exemption was added for labor or services to apply, install, repair, or maintain tangible personal property used in manufacturing or processing distilled spirits, wine, or malt beverages under KRS 139.470(22).

H.B. 351 clarified that nonprofits could sell admissions to a golf course when the admission is part of a fundraising event, although all other golf course admissions are subject to sales tax.12

H.B. 351 amended KRS 132.195(g) to expand the property tax exemption when an exempt person leases interests in residential property to those over 55 in some circumstances. It also provides an exemption for privately owned leasehold interests in residential property owned by a purely public charity when the unit is leased to a person receiving medical or educational supportive services from the charity and the lessee is a postsecondary educational participant, minor, sick, disabled, impoverished, or over the age of 65.13

In an expected move, H.B. 351 subjected vaping products to Kentucky’s tobacco product tax at a rate of either 15 percent (similar to most other non-cigarette tobacco products) for open vapor products typically bought at a vape shop or $1.50 per closed vapor cartridge (for example, Juul cartridges), but the tobacco industry survived a push to increase the tobacco tax on snuff and Snus.14

H.B. 351 amended KRS 224.50-868 to include many definitions related to motor vehicles and imposed a fee on the retailers of motor vehicle, trailer, and semitrailer tires sold in the state. This fee is also subject to Kentucky sales tax.15

H.B. 351 provided relief to the struggling coal industry in the form of a severance tax refund for those exporting coal to a market outside North America.16 A taxpayer must file an application to claim the refund, which will sunset in 2022.

H.B. 351 was initially vetoed by Beshear, although the House overrode the veto 57 to 32, and the Senate did the same with a 24-to-9 vote. It passed on the last day of the session. Some constitutional questions were raised as Beshear used a line item veto for H.B. 351, which can only be used for a budget bill. The governor’s reported objections to the bill included discrepancies between the adoption of the new partnership level for tax assessments based on the new federal partnership audit rules and the current Kentucky laws governing partnership taxes; failure to provide how the new renewable chemical tax credit is calculated; and the belief that the language expanding the business machinery sales tax exemption is overbroad. Nevertheless, the legislature overrode the governor’s veto and the bill advanced.

Local Jurisdiction Tax Changes

Local jurisdictions’ taxing power was another focus of the 2020 legislative session. S.B. 5 creates a new section of KRS Chapter 65A that requires special purpose governmental entities wishing to increase current ad valorem taxes or levy ad valorem taxes for the first time to request permission from their governing or appointing body. This requirement does not apply to an air board, fire protection district, or ambulance taxing district. The bill was vetoed by Beshear, but the Senate overrode the veto, passing the bill 27 to 7, and the House did the same in a 56-30 vote. The governor’s reason for vetoing the bill was that it would hinder special purpose governmental entities because the entities are created to be flexible and move rapidly to address community challenges.

Pandemic Tax Changes

On March 30 the governor signed S.B. 150 into law, providing support to individuals, businesses, and healthcare providers in response to the spread of the coronavirus. While the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act was passed by Congress to provide relief to individuals and businesses harmed by the virus, many state legislatures, including Kentucky’s, chose to provide supplemental aid. This bill included a variety of pandemic related provisions, some of which directly related to state and local tax practices.

S.B. 150 authorized local jurisdictions to extend filing and payment deadlines for local occupational license taxes, allowing localities to sync their filing deadlines with the state and federal governments. It also instructed the DOR to follow federal filing extension guidelines.

Administrative Changes

The DOR also made administrative changes in response to the pandemic, such as business personal property tax return filing and payment deadline extensions and requiring local counties to delay the annual real property tax appeal period from May to July. Kentucky’s annual two-week period to appeal values for real property tax purposes typically starts the first week of May and extends for 13 days (the open inspection period). However, most jurisdictions will now begin the open inspection period on July 6. While the final day to file a protest has been mandated by the DOR, some jurisdictions, including Fayette County, will allow protests to be filed before July 6. And while some larger counties already allowed or required protest conferences to be held online or over the phone, there will generally be no in-person conferences conducted for the 2020 tax year. This could prove problematic for smaller counties that do not already have a procedure for these conferences in place.

Conclusion

How the coronavirus pandemic will continue to shape the health and economy of the commonwealth is uncertain, but the General Assembly must continue to work to provide both temporary and long-term relief in its wake. Several of the changes made this session, such as the COVID-19 relief bill and expanded credits and incentives for various industries, are helpful in the short term, but because Kentucky’s economy is greatly dependent on manufacturing and other industrial areas hit hard by government-ordered shutdowns, it may struggle to bounce back from the pandemic more than states with more tech-based economies. The General Assembly will be faced with the difficult task of aiding both the struggling industries and tax administrations and getting Kentucky citizens back to work.

FOOTNOTES

1 H.B. 351 sections 1-2, 9.

2 Id. at section 3.

3 Id. at sections 7, 16.

4 See id. at section 8.

5 Id. at section 11.

6 Id. at section 57.

7 Id. at section 18-19.

8 Id. at section 24-27.

9 Id. at section 34.

10 Id. at section 34.

11 Id. at section 35.

12 Id. at section 40-41.

13 Id. at section 60.

14 Id. at sections 39, 50-53.

15 Id. at section 29.

16 Id. at section 46.

END FOOTNOTES

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