Understanding the Kentucky Department of Revenue’s position on Kentucky’s tax laws and their application to common fact patterns is important to Certified Public Accountants and other tax practitioners, whether they are CPAs in public accounting advising their many clients or CPAs in industry advising their employers. The Kentucky Society of CPAs and the Kentucky Chamber of Commerce are working with the Department to make more guidance available to Kentucky tax practitioners.
Governor Bevin recently launched his Red Tape Reduction Initiative. The Initiative’s website, redtapereduction.com, is soliciting feedback on regulations, “If you are aware of a regulation that you believe to be outdated, unnecessary or overly complex, let us know by filling out this form. All suggestions will be reviewed and evaluated.”
Following are several areas in which additional guidance would be helpful to taxpayers and their advisers.
Prospective Publication of Ruling Requests and Final Rulings
The Department should consider amending 103 KAR 1:010 or promulgating a new administrative regulation to authorize and require the prospective publication of ruling requests made by taxpayers on particular topics of general interest and final rulings issued to taxpayers. Many states do this, including Kentucky’s neighbor to the north, Indiana, in the form of revenue rulings and letters of findings, which are redacted to insure taxpayers’ confidentiality.
Issuance of Educational Bulletins
The Department is specifically authorized to issue educational bulletins regarding sales tax provisions to the extent necessary to enhance the understanding of and compliance with the Streamlined Sales and Use Tax Agreement. It would certainly be a great benefit to all taxpayers and tax practitioners if the Department could do this for all tax provisions.
Personal Property Tax
In the area of personal property tax, one of the most pervasive issues is the classification of property, e.g., between Schedule A (full rate) and Schedule B (manufacturing machinery, etc.) property. As such, the Department should consider amending 103 KAR 8:090 or promulgating a new administrative regulation regarding the classification of property. The Department has already provided guidance for several industries including: coal [103 KAR 8:130]; crushed stone, sand, and gravel [103 KAR 8:140]; and hot mix asphalt [103 KAR 8:150]. Additional guidance as to classification of property, including examples, would provide needed guidance to taxpayers.
Limited Liability Entity Tax
The Limited Liability Entity Tax (LLET) is one of Kentucky’s newest taxes. It is also one for which there is no administrative guidance in the form of a regulation. While there is an administrative regulation for the Alternative Minimum Calculation (AMC), 103 KAR 16:220, there is no administrative regulation for the LLET. Guidance is needed, particularly as to the computation of cost of goods sold, among other issues.
Corporation and Partnership Income Tax
In the mid-2000’s, the Department updated many of the income tax regulations, including:
- 103 KAR 16:240 Nexus Standard for Corporations and General Partnerships
- 103 KAR 16:230 Intangible Expenses, Intangible Interest Expense and Management Fees
- 103 KAR 16:360 Deductibility of Certain Other State Taxes
- 103 KAR 16:090 Apportionment; Payroll Factor
- 103 KAR 16:270 Apportionment; Sales Factor
- 103 KAR 16:290 Apportionment; Property Factor
- 103 KAR 16:060 Income Classifications; Business and Non-Business
The addition of examples to these regulations would assist taxpayers in understanding the Department’s position. This would facilitate compliance.
The Department should also promulgate a regulation concerning the mandatory nexus consolidated return.
Individual Income Tax
One area that tax practitioners and taxpayers often have questions about is the state of residence of individuals. The Department should update 103 KAR 17:010 to provide additional guidance regarding, for example, the determination of a person’s state of domicile.
Trust Income Tax
The Department has not updated 103 KAR 19:010, Computation of Income; Estates and Trusts, since 1975. It would seem that there have been some developments since it was promulgated.
Sales and Use Tax
There are many issues in sales and use tax. However, questions regularly arise regarding exemptions for manufacturers. It would be helpful if the Department would update 103 KAR 30:120, Machinery for new and expanded industry, and to also promulgate a regulation regarding manufacturing supplies and industrial tools.
Another big issue in sales tax, nexus is a source of confusion for many taxpayers, especially those who are not based in Kentucky. This would help non-Kentucky based taxpayers to better understand the Department’s position as to the requirements for filing and payment of sales tax.
“You complete me.” Jerry Maguire, 1996
How can one be completely informed and compliant without complete information? More information on the Department’s positions will generally increase compliance in that taxpayers will not be ignorant of them, and clearly stated positions are less open to misinterpretation.
This is a modified version of Mark A. Loyd’s regular column, Tax in the Bluegrass, “Tax Guidance Kentucky Taxpayers Need” which appeared in Issue 4, 2016 of the Kentucky CPA Journal.