With a new governor, Andy Beshear, taking office in December 2019 and the “long” legislative session starting in January 2020, the December holiday season seems like a good time to put together a wish list for Kentucky taxpayers. While all of these may not be on everyone’s list, it might be worth a wager of the usual amount that at least some are.
More Guidance for Taxpayers from KDOR
Over the past four years, the Kentucky Department of Revenue has increased the amount of guidance that it provides to taxpayers. For example, the Department now issues: Revenue Procedures, Private Letter Rulings, Technical Advice Memoranda, and General Information Letters. See KY-RP-19-03. And, guidance is more available like the Department’s “Guidance” section on its website, revenue.ky.gov, and taxanswers.ky.gov. This is a great start, but taxpayers seeking to comply need more guidance: more RPs; more PLRs; more TAMs; more GILs.... Guidance is also important because it helps ensure that businesses in the same industry are taxed (or exempted) consistently.
One-Stop Local Occupational License Tax Filing
According to the Kentucky Secretary of State’s website, app.sos.ky.gov/occupationaltax/, there are 214 local jurisdictions that impose an occupational license tax. Even with the uniform tax return form, OL-S, the compliance burden on taxpayers is heavy, because of having to file multiple local tax returns, even dozens or hundreds. Localities likely miss out on tax revenue as well when businesses either do not know about their local filing obligation or are forced into a Hobbesian choice -- spend more to prepare a local return than the tax due on the return or not file it. There has to be a more tax-friendly way. If central filing administered by the Department is not the answer, what about central filing administered by a board consisting of representatives of the localities?
Lower State and Local Income Tax Rates
Even with the reduction to a 5% Kentucky state income tax rate, with local taxes, the combined state and local tax rate in the Commonwealth can easily be 6%, 7% or even more than 8%. For Kentucky to compete for factories, headquarters, and jobs with states like Tennessee and Indiana, the Commonwealth must continue to find a way to reduce income tax rates – personal and corporate. With its budget challenges, a reduction in income tax rates could require the Commonwealth to choose between cutting income tax rates and raising other tax rates or eliminating tax exemptions, though exemptions necessary for the effective functioning of any given tax (e.g., exemptions that prevent pyramiding, exemptions that prevent extraterritorial taxation, exemptions that make Kentucky competitive, etc.) must be preserved.
Refrain from Taxing Professional Services
There are many solid reasons why professional services (e.g., accounting, tax, legal, etc.) should not be subject to sales tax. Importantly, taxing professional services would make Kentucky an outlier and uncompetitive. The consensus among economists is that business inputs should not be taxed, and most professional services are business to business transactions. Moreover, accounting, tax, and legal services are necessary to comply with many taxes. So, why tax the services necessary for compliance? Additionally, professional services are difficult to source, since the service is often performed in one state and the benefit is received in another state, and this poses significant compliance issues and increases the potential for double taxation. The American Institute of Certified Public Accountants opposes sales taxes on professional services. https://www.aicpa.org/advocacy/state/statetaxresources.html. According to the AICPA, “The idea to tax services is not a new one. Minnesota, Massachusetts, Michigan and Florida all tried to impose sales taxes on services in the past, but their efforts were quickly repealed.” Id.
Increase Tax Revenues without Hurting Kentuckians or Kentucky Businesses
“How do we pay for all this?” are words often heard uttered by parents during the holidays or government officials during budget discussions. And, of course there is the famous saying, “Don’t tax you. Don’t tax me. Tax the guy behind the tree.” There are options, however. For example, Kentuckians cross into states bordering the Commonwealth to gamble in casinos and to make sports bets. So, legalizing gambling and collecting gaming taxes is an option to increase revenues without imposing additional taxes on Kentuckians or Kentucky businesses. One can take issue as to the purported “evils” of gambling, but the revenue loss is real. Surely other options exist as well.
Likewise, should the Commonwealth authorize local sales taxes, they should comply with the central collection requirement of the Streamlined Sales and Use Tax Agreement of which Kentucky is a member. Even when taxes increase, they should not also increase taxpayers’ compliance burdens.
Modernize Manufacturing Sales Tax Exemptions
Disputes often arise between the Department and taxpayers regarding manufacturing sales tax exemptions. Perhaps this is partly because some of the wording of the statutory exemption was derived from a regulation originally promulgated in the 1960’s? Regardless, Kentucky manufacturers consistently face uncertainties regarding the application of manufacturing exemptions. An exemption that seemingly should apply in a taxpayer’s eyes may not in the eyes of the Department. For example, Century Aluminum of Kentucky, GP v. Dep’t of Revenue, No. 17-R-39, Order No. K-25903 (KCC Mar. 27, 2019), appealed, No. 19-CI-00424 (Franklin Cir. Ct. Apr. 26, 2019) involves disputes over several items that many taxpayers would consider exempt: anode stubs; inductotherm lining; thermocouples and tube assemblies; welding wire and industrial gases; refractory material used to seal pots and keep gases from escaping; refractory paper used in the inductotherm furnace; and, refractory material used to fill holes between firebricks in the carbon bake furnace. Kentucky’s competitor states have broader exemptions that clearly apply to modern manufacturing practices. Kentucky should modernize its manufacturing sales tax exemptions.
Consolidate Agricultural Sales Tax Exemptions
There are many agricultural exemptions, including for livestock, poultry, farm work stock, seeds, farm chemicals, feed, farm machinery, on-farm facilities, farm fuel, ratite birds and eggs, llamas and alpacas, bailing twine and wire, water, buffalo, aquatic organisms, and, cervid, though each exemption has its own requirements. KRS 139.480. These are quite complex and not all the same; so, they can lead to disputes between taxpayers and the Department. See, e.g., Tractor Supply Co. v. Dep’t of Revenue, File No. K08-R-21, Order No. K-20813 (KBTA 2010). Kentucky should preserve and simplify these important exemptions.
Uniform Assessments for Leased Property
Over the past couple of years, assessments on properties that are subject to leases have been increasing, primarily due to Property Valuation Administrators computing assessment values using actual rent and national capitalization rates. This appears to stem from Wilgreens v. O’Neill. No. 2015-CA-000407-MR (Ky. App. 2016) (unpublished). This methodology tends to overvalue leased properties in contrast to those valued using a combination of the cost approach, sales approach and income approach.
Equalize Interest Rates on Tax Overpayments and Underpayments
There is a 4 percentage point spread between interest paid on overpayments (refunds) to taxpayers and interest paid on underpayments (assessments) by taxpayers. KRS 131.183. Interest rates should be equalized.
Streamline Tax Appeals
The tax appeals process in Kentucky is unnecessarily long and burdensome to taxpayers. In Indiana, a taxpayer appeals from the Department of Revenue to the Indiana Tax Court and then there is a discretionary appeal to the Indiana Supreme Court; similarly, in Ohio a taxpayer appeals from the Ohio Department of Taxation to the Ohio Board of Tax Appeals and then to the Ohio Supreme Court, except for property tax appeals which are appealed to an Ohio Court of Appeals. Why can’t Kentucky taxpayers simply appeal from the Department to the Kentucky Claims Commission and then directly to the Kentucky Court of Appeals? Why must Kentucky taxpayers have to go through a Circuit Court? Eliminating the Circuit Court layer would seem eminently logical.
Is your wish list the same? Do you have items to add? Items that you would leave off?
Not all of the above items require legislation. But, for those that do, the 2020 session will be an interesting one with a Democrat in the governor’s office and Republicans with majorities in the both legislative houses.
Hopefully, 2020 will see Kentucky’s tax climate continue to improve! Happy Holidays!
This is a modified version of Mark A. Loyd’s regular column, Tax in the Bluegrass, “A 2020 wish list for Kentucky taxpayers” which appeared in Issue 5, 2019 of the Kentucky CPA Journal.