Have there been any notable recent developments concerning state and local taxation in your state, including any regulatory changes or case law?
The 2018 Kentucky General Assembly enacted fairly comprehensive tax changes in House Bill (HB) 487.
Significant income tax changes, generally effective for tax years beginning on or after January 1 2018, include:
- reducing the individual income tax and corporate income tax rate to 5%;
- updating Internal Revenue Code reference as of December 31 2017 (to include Tax Cuts and Jobs Act 2017 provisions, with certain exceptions—e.g., 100% depreciation deduction, Section 179 expensing, and the 20% Qualified Business Income deduction);
- eliminating itemized deductions for individuals except mortgage interest and charitable contributions;
- adopting a single sales factor apportionment formula for apportionable income of multistate businesses; and
- replacing the mandatory nexus consolidated return filing requirement with mandatory unitary combined reporting with an election to file a federal consolidated group return (effective for tax years beginning on or after January 1 2019).
HB 487 also provides a 25% non-refundable income tax credit on property tax on inventory, starting in 2018 and increasing by 25% each year, thus partially phasing out the inventory tax.
Other significant changes include:
- imposing sales and use tax on several services including repair, installation, and maintenance of tangible personal property (with an exemption for manufacturers and industrial processors), as well as other specified services, effective July 1 2018;
- adding additional nexus-creating requirements directed at remote sellers;
- increasing the cigarette tax to $1.10 per pack; and
- implementing several pro-taxpayer administrative changes.
What primary and secondary legislation governs the collection and remittance of taxes in your state?
Title XI of the Kentucky Revised Statutes (KRS), Chapters 131 to 144, governs the imposition, collection, and remittance of taxes. Section 2, as well as Sections 169 to 182, of the Kentucky Constitution, among others, also place limitations on the Commonwealth with regard to taxes.
What government authorities (at both state and local level) are charged with the collection and administration of taxes, and what are the extent of their powers?
Most state-level taxes in Kentucky are administered and collected by the Kentucky Department of Revenue. The Transportation Cabinet administers and collects certain Road Fund taxes, including the U-Drive-It tax on leases and rentals of motor vehicles. Real property taxes are assessed by county property valuation administrators, and real and personal property taxes are collected on the local level by locally elected officials; however, the Department of Revenue centrally administers tangible personal property tax audits and assessments. Local taxes are administered by the locality imposing the local tax—for instance, local occupational license (effectively income) taxes; however, the department administers centrally collected local taxes including utility gross receipts license taxes.
The Department of Revenue has certain powers delegated to it by the General Assembly, including the authority to promulgate regulations, consider and settle disputes, and other powers enumerated in KRS Chapter 131, subject to statutory limitations such as the Kentucky Taxpayers’ Bill of Rights and the Kentucky Constitution. Local taxing authorities typically have similar powers delegated to them via legislation, subject to any limitations imposed by the KRS or the Kentucky Constitution.
How would you describe the balance between taxes collected at state and local level?
The majority of Kentucky taxes are assessed and collected at the state level. In addition to real and personal property taxes, many counties, school boards, and cities in Kentucky impose occupational license taxes on wages and business income. Localities cannot impose sales taxes.
Tax year and filing deadlines
What is the prescribed tax year in your state and what filing deadlines apply?
Kentucky individual and corporate income taxes are generally imposed based on each taxpayer’s tax year, which is generally a calendar year, with the annual tax return being due on the 15th day of the fourth month following the close of the fiscal year (i.e., April 15 for calendar year taxpayers), unless extended for up to six months (KRS 141.160 and 141.170). A taxpayer’s sales tax return generally must be filed by the 20th of the month following the reporting period, unless the Department of Revenue authorizes quarterly or annual tax return filings (KRS 139.540). Property taxes are assessed annually based on the fair cash value as of January 1, and taxpayers must file tangible personal property tax returns with the county of taxable situs by May 15.
How competitive is your state in terms of taxation in relation to other states? What is the government’s general policy and approach to taxation?
Kentucky imposes the three main tax types: income, property, and sales and use. With the enactment of House Bill 487, Kentucky’s income tax rates have become more competitive with neighboring states; its sales tax rate is competitive as well. In terms of overall tax climate toward businesses, some consider Kentucky to generally rank in the top third.
Corporate income and franchise taxes
How is taxable income determined in your state? To what extent is the state income tax base aligned with the federal income tax base?
Kentucky taxable income is determined by reference to the Internal Revenue Code 1986, as amended as of December 31 2017 (including Tax Cuts and Jobs Act 2017 provisions, with certain exceptions—e.g., 100% depreciation deduction, Section 179 expensing, and the 20% Qualified Business Income deduction)—modifying federal taxable income by certain additions and subtractions, and allocating and apportioning such income to Kentucky (Kentucky Revised Statutes (KRS) 141.010).
How is in-state income apportioned for multi-state businesses? Does your state regulate transfer pricing?
Apportionment is governed primarily by KRS 141.120.
A single sales factor apportionment formula, except for providers of communication and cable services, is used to apportion a taxpayer’s apportionable income. The sales factor is computed based on the ratio of receipts in Kentucky versus everywhere. The location of sales of tangible personal property are assigned based on the destination of the goods, and there is no throwback rule for non-governmental sales; other receipts are assigned based on market-based sourcing rules.
The following types of income, provided that the income is non-apportionable, is allocated to Kentucky:
- net rents and royalties from real property located in the state;
- capital gains and losses from sales or other dispositions of real property located in the state;
- interest if the corporation’s commercial domicile (i.e., the principal place from which the trade or business of the corporation is managed) is in the state; and
- patents and copyrights if and to the extent the property is utilized by the payer either in the state or in a state in which the corporation is not taxable and the corporation’s commercial domicile is in the state. Non-apportionable income that is not allocated to Kentucky is allocated outside of Kentucky.
A taxpayer may petition or the Kentucky Department of Revenue may require other allocation and apportionment methods if the standard provisions do not reflect the extent of the taxpayer’s business activity in Kentucky and the alternative provision is reasonable.
Kentucky regulates transfer pricing by disallowing certain deductions resulting from expenses paid to affiliated entities or related parties for intangible expenses, management fees, or related party costs, with certain exceptions as provided for by KRS 141.205.
How is nexus determined for corporate income tax purposes?
Nexus is determined using a ‘doing business’ standard. ‘Doing business’ in Kentucky includes, but is not limited to:
- being organized under the state’s laws;
- having a commercial domicile in the state;
- owning or leasing property in the state;
- having one or more individuals performing services in the state;
- maintaining an interest in a pass-through entity doing business in the state;
- deriving income from or attributable to sources within the state, including deriving income directly or indirectly from a trust or a single-member limited liability company (disregarded as an entity separate from its single member for federal income tax purposes) doing business in the state; or
- directing activities at Kentucky customers for the purpose of selling them goods or services.
103 KAR 16:240 provides guidance as to what constitutes doing business in Kentucky for income tax purposes and recognizes the limitations imposed by P.L. 86-272, codified as 15 U.S.C. 381 to 384, on the imposition of income taxes.
Is affiliate nexus recognized in your state? If so, to what extent? Has there been any notable case law in this area?
Other than ownership in a pass-through or disregarded entity doing business in Kentucky, the statutory definition of ‘doing business’ in KRS 141.010 and the nexus standard regulation, 103 KAR 16:240, do not directly address the concept of affiliate nexus. Kentucky has, however, adopted unitary combined reporting and elective consolidated reporting using the federal income tax consolidated group, effective for tax years beginning on or after January 1 2019. There have been no recent notable cases concerning affiliate nexus.
What are the applicable corporate income tax rates?
Kentucky’s corporate income tax rate for tax years beginning on or after January 1 2018 is 5% (KRS 141.040).
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
Deductions from gross income allowed by Chapter 1 of the Internal Revenue Code 1986, as amended as of December 31 2017 (including Tax Cuts and Jobs Act 2017 provisions, with some exceptions—e.g., the 100% depreciation deduction, Section 179 expensing, and the 20% Qualified Business Income deduction).
Any income that is exempt from taxation under the US Constitution (e.g., the Commerce Clause or Due Process Clause), federal statute (e.g., P.L. 86-272), or the Kentucky Constitution are exempt from taxation in Kentucky. Dividend income is also exempt.
There are many tax credits against the corporation income tax, including the limited liability entity tax credit, the Kentucky Business Investment Act credit, and the recycling/composting equipment credit. A list may be found on Kentucky Department of Revenue Form Schedule TCS, Tax Credit Summary Schedule.
What filing requirements and procedures apply? Are there special filing requirements for groups of company?
Kentucky corporate income taxes are generally imposed based on each taxpayer’s tax year, which is generally a calendar year, with the annual tax return being due on the 15th day of the fourth month following the close of the fiscal year (i.e., April 15 for calendar year taxpayers), unless extended for up to six months (KRS 141.160 and 141.170).
Corporate entities doing business in Kentucky are required to file a return unless they are exempt from Kentucky corporate income tax under KRS 141.040. For tax years beginning on or before January 1 2019, corporate taxpayers must file, as part of a mandatory nexus, consolidated return filing group, which generally includes each includible corporation with nexus with Kentucky 80% or more owned by a common parent corporation that is itself an includible corporation (KRS 141.200).
For tax years beginning on or after January 1 2019, Kentucky will require unitary combined reporting for multistate companies unless the company is a part of a group that elects to file a consolidated return based on the federal income tax consolidated return group.
Corporate franchise tax
Does your state impose a corporate franchise tax? If so, is it imposed in lieu of or in addition to corporate income tax?
Kentucky does not impose a corporate franchise tax, but it does impose a limited liability entity tax pursuant to KRS 141.0401 on every non-exempt corporation and limited liability pass-through entity doing business in Kentucky on all Kentucky gross receipts or Kentucky gross profits.
If your state imposes a corporate franchise tax, please stipulate:
(a) The applicable tax base
The tax base for the limited liability entity tax is the taxpayer’s Kentucky gross receipts or gross profits (KRS 141.0401).
(b) The tax rates
The tax rate is $0.095 per $100 of the entity’s Kentucky gross receipts and $0.75 per $100 of the entity’s Kentucky gross profits. The annual limited liability entity tax imposed is the lesser of these two amounts or $175 (KRS 141.0401).
(c) Any exemptions or deductions
There is a small-business exemption for businesses with total gross receipts or profits of less than $3 million, which is phased out between $3 million and $6 million. Certain organizations are exempt, including, but not limited to, financial institutions, insurance companies, alcohol production facilities, REITs, and charitable or otherwise tax-exempt corporations (KRS 141.0401).
(d) Filing formalities
A taxpayer generally complies with their limited liability entity tax filing obligation on the same return as they do their income tax return filing obligation, such as Kentucky Department of Revenue Forms 720, 720S, or 765. Individually owned single member limited liability companies may file Kentucky Department of Revenue Form 725. A disregarded single member limited liability company owned by a regarded entity is included in the return of its single member owner.
Personal income taxes
How is taxable personal income determined in your state?
A taxpayer’s adjusted federal gross income is used as the starting point for Kentucky’s entire net income, regardless of where it was earned. Then, there are certain additions or subtractions and deductions that result in a taxpayer’s Kentucky adjusted gross income (Kentucky Revised Statutes (KRS) 141.020).
Under what circumstances is an individual deemed resident in your state for personal income tax purposes?
KRS 141.010 defines ‘resident’ to mean “an individual domiciled within this state or an individual who is not domiciled in this state, but maintains a place of abode in this state and spends in the aggregate more than one hundred eighty-three (183) days of the taxable year in this state.” Accordingly, an individual may be a resident because the individual is a domiciliary of Kentucky, or the individual may be a statutory resident because the individual comes within the statutory test of residency—that is, has an abode and spends more than 183 days in the Commonwealth.
What are the applicable personal income tax rates?
For tax years beginning on or after January 1 2018, the personal income tax is 5% (KRS 141.020).
Exemptions, deductions and credits
What exemptions, deductions, and credits are available?
Except for deductions for mortgage interest and charitable contributions, itemized deductions have been eliminated under House Bill 487. Pension income is excluded up to $31,110 per person. Taxpayers who pay taxes in a state other than Kentucky on non-Kentucky-sourced income are entitled to a credit against their Kentucky income tax for the amount paid to another state. There are many other tax credits against the income tax, including the limited liability entity tax credit, the Kentucky Business Investment Act credit, and the recycling/composting equipment credit. A list may be found on Kentucky Department of Revenue Form 740, page 2, on line 30 and in Section A.
What filing requirements and procedures apply?
Kentucky individual income taxes are generally imposed based on each taxpayer’s tax year, which is generally a calendar year, with the annual tax return being due on the 15th day of the fourth month following the close of the fiscal year (i.e., April 15 for calendar year taxpayers), unless extended for up to six months (KRS 141.160 and 141.170).
What obligations are imposed on the employer in relation to the collection and remittance of state personal income taxes (eg, withholding)?
Generally, every employer must deduct and withhold from wages a tax as determined by tables created by the Kentucky Department of Revenue.
Sales and use taxes
What goods are subject to sales and use tax in your state (at both state and local level)?
Kentucky sales tax applies to each retailer’s gross receipts derived from sales of non-exempt tangible personal property, including natural, artificial, and mixed gas, electricity, water, steam, and prewritten computer software, as well as digital property (Kentucky Revised Statutes (KRS) 139.200). Kentucky use tax applies to non-exempt tangible personal property used in Kentucky that was purchased for use in Kentucky.
What is the state sales tax rate?
Kentucky’s sales tax rate is 6%.
What is the range of local sales tax rates levied in your state?
There are no local sales taxes in Kentucky.
What goods are exempt from sales and use tax?
Certain goods are exempt from sales and use tax including coal and other energy-producing fuels, certain medical items, locomotives or rolling stock, certain farm machinery and livestock, certain seeds and farm chemicals, machinery for new and expanded industry, tombstones, textbooks, property certified as an alcohol production facility, aircrafts and replacement parts, food purchased with food stamps, recycling machinery, repair and replacement parts of certain trucks and buses, and donated food items (KRS 139.480). Additional goods that are exempt include certain materials, supplies, and tools used in manufacturing, water used in the raising of equine as a business, newspaper inserts and catalogues delivered out of state, uranium sold out-of-state, and metal retail fixtures sold out-of-state (KRS 139.470). Motor vehicles, gasoline, and special fuels are exempt from sales and use tax but subject to excise taxes imposed pursuant to KRS Chapter 138 (KRS 139.470). Food for human consumption and medical supplies and equipment are exempt (KRS 139.485; KRS 139.472). There are exemptions for other items.
Certain transactions are exempt, including sales for resale, occasional sales, and sales to certain charitable organizations and non-profit institutions. Gross receipts from the sale, storage use or other consumption in Kentucky of tangible personal property or digital property which is prohibited from taxation by the Federal or Kentucky Constitutions are also exempt.
Are any services taxed?
Sales tax is imposed on specifically enumerated services (KRS 139.200), including:
- rental of any room, lodgings or accommodations for a period of less than 30 days;
- sewer services to non-residential consumers;
- admissions with the most notable exception being race track admissions;
- prepaid calling services;
- communications services; and
- distribution and transmission of natural gas to non-residential consumers.
Effective July 1 2018, sales and use tax is also imposed on:
- labor and services associated with the repair, installation, and maintenance of taxable tangible personal property, though an exemption is included for manufacturers and industrial processors;
- landscaping and lawn care services;
- janitorial services;
- pet care (small animal) veterinarian services;
- industrial laundry services; dry cleaning services;
- linen supply services;
- pet grooming and boarding services;
- diet and weight reducing services;
- tanning services;
- limousine services; and
- many additional admissions.
What filing requirements and procedures apply?
A taxpayer’s sales tax return generally must be filed by the 20th of the month following the reporting period, unless the Kentucky Department of Revenue authorizes quarterly or annual tax return filings (KRS 139.540).
How is the value of property assessed for tax purposes in your state? Which types of property are subject to tax?
All classes of property in Kentucky are subject to taxation, unless exempted by the state constitution or by statute. All taxable property must be listed annually, valued and assessed in the county where it is located as of January 1 of each year. Property is assessed at its fair cash value, estimated at the price that it would bring through a fair and voluntary sale. Property is also valued at fair market value, determined by using one, or a combination, of the leading three methods (Kentucky Revised Statutes (KRS) 132.191(2)):
- cost approach (reproduction or replacement);
- sales or market approach; or
- income/capitalization approach.
What is the state property tax rate?
Property tax rates vary according to how the property is classified and are set annually by the Department of Revenue. The 2017 state rate for most real estate was $0.122 per $100 of value, with interstate railroads and leasehold interests subject to a state rate of $0.10 per $100 and $0.15 cents per $100, respectively.
The state tax rate for tangible property without a specially defined rate is $0.45 per $100 of value (KRS 132.020). State tax rates lower than $0.45 per $100 apply to:
- certain privately owned leasehold interests;
- qualifying voluntary remediation property;
- unmanufactured agricultural products;
- farm machinery;
- tangible personal property located in an activated foreign trade zone;
- machinery engaged in manufacturing;
- commercial radio and television equipment;
- certified pollution control facilities;
- certified alcohol production;
- historic motor vehicles;
- certain railroad property;
- certain aircrafts; and
- certain vessels.
What is the range of local property tax rates levied in your state?
The typical real estate tax rates in cents per $100 are:
- school districts—65¢; and
- special tax districts—10¢.
Exemptions and deductions
What exemptions and deductions are available?
Section 170 of the Kentucky Constitution provides exemptions from property tax to government-owned property, educational institutions, religious institutions, public libraries, public cemeteries, and purely public charities. Tangible personal property (e.g., inventory) placed in a warehouse or distribution center for the purpose of subsequent shipment to an out-of-state destination is exempt (KRS 132.097 and KRS 132.099).
Tangible personal property subject to special lower state tax rates may also be exempt from local taxes (KRS 132.200).
What filing requirements and procedures apply?
Real property owners must list their property with the county Property Valuation Administrator (PVA) between January 1 and March 1; however, as a practical matter, property owners do not typically file forms with the local PVA.
Tangible personal property owners must list their property and file a tangible property tax return with the PVA between January 1 and May 15.
Real estate transfer tax
How is the transfer of real estate taxed in your state (including tax base, rates, exemptions, and filing formalities)?
A tax imposed on the transfer of real estate at a rate of $0.50 per $500 of value based on the value of the transferred property as set forth in the deed. The tax is collected by the county clerk as a prerequisite to recording the deed. Kentucky’s real estate transfer tax does not apply to the following types of transfer (KRS 142.050):
- by gift;
- between spouses;
- on partition;
- on sale for delinquent taxes;
- pursuant to a business merger, consolidation, conversion, or upon formation;
- between trustees;
- from a trustee to a beneficiary; or
- in order to provide or release security for a debt or obligation.
Unclaimed and abandoned property
Reporting and remittance
Describe your state’s regime for reporting and remitting unclaimed and abandoned property. How is the value of such property calculated? How assertive is your state in enforcing its rights to unclaimed property?
Unclaimed property reports must be filed electronically by November 1 of each year, though an extension is allowed, and the property must be paid or delivered to the state by the same date. Kentucky Revised Statutes Chapter 393 contains the dormancy periods applicable for unclaimed property. Before filing the report, the abandoned property holder must send written notice to the owner 60 to 120 days for property worth $100 or more. There is no minimum reporting amount, though businesses do not have to report unclaimed wages of less than $50. The abandoned property holder must generally maintain records for five years after filing the report, and a reporting institution must retain interest-bearing accounts for 10 years if the property is not rightfully claimed (20 KAR 1:080). The rightful owner may file a claim to regain custody of the property.
Excise and other indirect taxes
What excise taxes are levied in your state, including applicable goods, rates, and filing formalities?
Effective July 1 2018, excise taxes are imposed on cigarettes at a total combined rate of $1.10 on each 20 cigarettes. For tobacco products, an excise tax is imposed at a rate of $0.19 per 1.5 ounces of snuff and per single unit of chewing tobacco. For all other tobacco products, the rate is 15% of the products’ sales price. Licensed wholesalers and distributors must generally file monthly returns by the 20th day of the following month. Every manufacturer that ships tobacco products into Kentucky is required to file a monthly report identifying all shipments made in the previous month, including the names and addresses where the products were shipped, as well as a description of the quantity and type of tobacco product shipped.
Excise taxes are also imposed on gasoline and special fuel at a rate of 9% of the average wholesale price paid on a per-gallon basis. In addition, a supplemental highway use motor fuel tax is imposed at the rate of $0.05 per gallon on gasoline and $0.02 per gallon on special fuel. Every gasoline and special fuel dealer must transmit to the Kentucky Department of Revenue, by the 25th day of each month, reports of the total number of gallons of gasoline and special fuel received in the state during the preceding calendar month. The reports are to be accompanied with payment for the amount of tax due for the preceding calendar month.
An excise tax on motor vehicle usage is imposed at a rate of 6% of the retail price on the use of every motor vehicle in the state. The tax is collected by the county clerk when the vehicle is first registered or offered for titling. U-Drive-It tax is a usage tax of 6% levied upon the amount of the gross rental or lease charges paid by a customer or lessee renting or leasing a motor vehicle. The tax is reported and paid monthly by the U-Drive-It.
Kentucky also imposes an alcoholic beverages tax on distilled spirits, wine, and malt beverages on a per-gallon rate; tax returns and payment are due by the 20th of each month (Kentucky Revised Statutes (KRS) 243.720; KRS 243.730).
Other excise taxes are imposed pursuant to KRS Chapter 138.
Other indirect taxes
Are any other indirect taxes levied in your state?
Kentucky also imposes severance taxes on coal and other natural resources in KRS Chapters 143 and 143A.
Do any other taxes apply to businesses in your state? If so, please include applicable tax bases, rates, exemptions/deductions, and filing formalities.
The bank franchise tax is assessed at the rate of 1.1 % of net capital with a minimum of $300 due per year. The return is due on or before March 15 following each calendar year.
The insurance premiums tax is paid by all life insurance companies, all stock insurance companies, all mutual insurance companies, and all captive insurers doing business in Kentucky. It is assessed on premiums collect by insurance companies on policies written in Kentucky during the preceding calendar year.
Does your state offer any tax incentive schemes to attract businesses and promote investment?
The Kentucky Economic Development Finance Authority, established within the Cabinet for Economic Development, provides financial support to several types of business through an array of financial assistance and tax credit programs.
What tax compliance procedures and best practices should businesses operating in your state be aware of?
Taxpayers should determine whether they have nexus with Kentucky prior to engaging in business in the Commonwealth. Taxpayers can then register with the Kentucky Department of Revenue for all the types of tax that may apply to their business. They should ensure that the contact person listed on the registration form is one who will carefully review and respond to any correspondence from the Department of Revenue. Taxpayers should keep their mailing address up to date with the Department of Revenue to ensure that they do not miss important notices from the department.
If a taxpayer believes that it is engaged in business in the Commonwealth and may not have been filing required tax returns and making required payments, the taxpayer should consider whether it actually must file and pay such taxes and, if so, whether a voluntary disclosure may be appropriate to limit back year tax exposure and likely penalties for non-filing and non-payment.
Seeking the advice of tax advisers with experience in Kentucky can help taxpayers who have received a notice of audit or a notice of tax due (i.e., an assessment) navigate the audit, protest, and appeal procedures. Taxpayers interested in appealing to the Kentucky Claims Commission should also be aware that only a licensed Kentucky attorney may file such an appeal.
A review of a company’s operations by an adviser with experience in Kentucky can also often assist in finding exemptions, deductions, and credits or potential liabilities of which the company may not be aware. For example, sales tax exemptions and personal property tax classifications for manufacturers are particularly complex. The limited liability entity tax has some unique features. And, of course, deciding between filing income tax returns as unitary or electing consolidated filing is anticipated to be an area with opportunities and traps.
What strategic planning considerations should businesses operating in your state bear in mind to optimize tax efficiency?
Taxpayers should regularly review potential tax incentives programs and credits that may be available to them and be aware that some may require an application or approval before a particular project begins. Incentives may be available for capital expenditures, hiring practices, or relocation.