The sections below highlight several prominent legislative, administrative, and procedural developments and their impact on Kentucky taxpayers.
I. 2018 Kentucky Tax Legislation
A. Kentucky Tax Reform
The 2018 Kentucky General Assembly enacted tax reform in two bills: House Bill 366 and House Bill 487. These include a number of important provisions that should be of great interest to many taxpayers. Among other things, the new laws:
Income Tax Changes (Generally effective for tax years beginning on or after 1/1/2018)
- Reduce the top marginal corporate income tax rate to a flat 5%. Reduce the top marginal personal income tax rate to a flat 5%.
- Update the Internal Revenue Code reference date within the Kentucky tax code to be December 31, 2018 to conform to the Tax Cuts and Jobs Act of 2017, with certain exceptions, e.g., 100% depreciation deduction, Section 179 expensing, and the 20% Qualified Business Income deduction.
- Disallow the deduction for domestic production activities, which the Tax Cuts and Jobs Act also does.
- Apply a single-factor apportionment formula with market-based sourcing of receipts. Proposed regulations are in the works on this.
- Effective for tax years beginning on or after 1/1/2019, require a corporate taxpayer doing business in the Commonwealth that is a member of a unitary group to determine its corporation income tax using the unitary combined reporting method, unless the corporate group makes an election to file consolidated with its affiliated group under the Internal Revenue Code of 1986, as amended. Watch for legislation in 2018 that would repeal unitary or the unitary mandate. Also, see detailed discussion in Section VI. Unitary Combined Required, Unless Consolidated Elected.
Sales Tax Changes (effective 7/1/18)
- Impose sales tax on certain types of labor and services associated with the repair, installation, and maintenance related to the sale of taxable tangible personal property (with an exemption for manufacturers and industrial processors).
- Impose sales tax on landscaping services, veterinarian services for small animals, janitorial services, fitness and recreational sports centers, industrial laundry services, dry cleaning and laundry services, linen supply, limousine services, and a variety of other services.
- Impose sales tax on admissions to events, including fundraisers or charity events put on by nonprofit organizations, unless there is an educational component. Several state representatives have already pre-filed bills for the 2019 legislative session to address this issue and apply some sort of sales tax exemption to nonprofits or fundraisers.
- Impose sales tax on initiation fees, membership dues, monthly or annual fees, or single-use fees charged to access golf courses, gymnasiums, spas, swimming clubs, and other venues.
- Position Kentucky’s tax code to address the U.S. Supreme Court’s decision to overturn Quill Corp. v. North Dakota by allowing remote sellers to elect to collect and remit tax to Kentucky or report information to the Department for use tax compliance (see discussion below).
- Impose tax on pollution control facilities.
The Kentucky Department of Revenue has created a website (TaxAnswers.ky.gov) to answer common taxpayer questions on the sales tax changes and provide guidance on Kentucky tax reform topics. The website will continue to be updated.
Other Tax Changes
- Establish a phased-in inventory tax credit in an amount equal to the property tax timely paid on business inventory.