Kentucky taxpayers and their advisors need guidance upon which they can rely that helps flesh out Kentucky tax laws. The Department has promulgated administrative tax regulations that do just that for sales taxes, income taxes, property taxes, and other taxes. While there are Kentucky tax regulations that provide guidance, there is a lot of potential for regulations to be even more helpful. Better regulations mean clearer tax laws, and this benefits the entire system, taxpayers, advisers, and administrators. More and improved tax regulations can be expected in the near future. Kentucky Tax Regulations – Where Do I Find These Regulations of Which You Speak? Kentucky tax regulations promulgated by the Department may be found in Title 103 of the Kentucky Administrative Regulations. Each chapter represents major subject matter, e.g., general administration, inheritance tax, ad valorem tax, income tax, sales and use tax, etc. So, 103 KAR 16:060 refers to the Department’s regulation in Chapter 16 (Income Tax; Corporation) specifically concerning “Income classification; business and nonbusiness”. The Department’s regulations can be found on the website of the Legislative Research Commission (“LRC”), www.lrc.ky.gov, under the “Kentucky Law” drop down menu – click “Kentucky Administrative Regulations”. You can then click on the “Listed by Title” link and then select Title 103.* Commercial tax services like RIA and CCH are also places where they can be found. Regulation Subject Matter – These Don’t Seem to Cover Everything! Kentucky tax regulations appear to cover much of the subject matter of corporation income tax, including: business and nonbusiness income; property, payroll, and sales apportionment factors; apportionment and allocation for specific industry; nexus; and, many other subject matter areas. Some other tax areas, however, have comparatively few regulations. For example, there is only one regulation concerning estate and trust income tax, 103 KAR 19:010. Another example is ad valorem tax, which has only about a baker’s dozen. Of the areas of tax, sales and use tax has the most regulations. They address many circumstances, e.g., certain service and professional occupations, miscellaneous retailer operations, some general exemptions. But, they do not cover every situation. Most notably, there is not a regulation that addresses manufacturing supplies and industrial tools, which is the subject of many disputes between taxpayers and the Department. Administrative Regulation Process – If Not Enough, Just Issue More! The Department cannot just issue tax regulations all by itself by fiat. There is a process dictated by statute in Kentucky Revised Statutes Chapter 13A to create a new regulation or to amend one. The ordinary process for promulgating a regulation begins with the Department filing the proposed regulation which is followed by its publication in the Administrative Register, including information about the date, time, and place of the public hearing on the regulation and the deadline for the public to submit comments. After the public hearing is held and written comments are received, if any, the Department must file a statement of consideration. The Administrative Regulation Review Subcommittee (which is known by the acronym, “ARRS”) may determine it to be deficient or approve it and reports its findings to the Legislative Research Commission. Once and if approved, it becomes effective. The process is time consuming, and this explains, in part, why there are not more regulations. Stale Regulations – Should Tax Regulations Be Updated? In the mid-2000’s, the Department updated many income tax regulations, including those pertaining to business and nonbusiness income, apportionment, and nexus. But, in contrast, the individual income tax regulation concerning residence, 103 KAR 17:010, has not been updated since 1983. And, the trust income tax regulation, 103 KAR 19:010, has not been updated since 1975. Of course, a regulation may have been in place for less than a year and in need of an update when a tax statute is amended. Over the years, Kentucky’s tax laws have evolved. Clearly, Kentucky tax laws have likely evolved in some form or fashion since certain regulations were put in place or were last amended – 10, 30, 40 years ago. It should be noted that the Department has been working with the Kentucky Society of CPA’s Tax Committee to identify tax regulations most in need of updates. Outdated Regulations – Is There No Expiration Date? With regulations that have been on the books for 40 plus years, it would seem that regulations never expire. And, that was the case, but not anymore. In 2017, House Bill 50 changed that. According to the Department, “House Bill 50 … requires that an ordinary administrative regulation will expire seven years after its last effective date. An administrative regulation that has a last effective date prior to July 1, 2012 shall expire on July 1, 2019.” Ky. Dep’t of Revenue, Tax Alert (May 2017). What this means is that many tax regulations will expire in 2019! Fortunately, “The bill provides a process for Executive Branch agencies to certify to the legislature the reasons for not letting a regulation expire.” Id. And, the Department “will evaluate its existing regulations to determine how many we will certify to the legislature and keep in existence.” As the Department has recognized, regulatory guidance is important to taxpayers and their advisors. So, it would seem that tax regulations should not only be reviewed as to continuing relevance but should also be updated to make them even more useful.
Improving Regulations – Add Examples!
One way that the usefulness of tax regulations may be improved is by providing examples. There was a period of time when examples could not be used in tax regulations because they were often considered to be demonstrative, non-exclusive lists. However, this changed in 2010, when KRS 131.130(1) was amended to allow the use of examples “[t]o assist taxpayers in understanding and interpreting the tax laws…includ[ing] demonstrative, non-exclusive lists of items….” KRS 131.130(1). Given the 2010 statutory authorization to use examples, it would seem that when it evaluates its existing regulations, the Department should consider amending certain regulations to include examples.
Ongoing Need for Tax Regulations
Unlike some fields in which regulations are hated, tax is an area in which taxpayers and their advisors value them. In the next couple of years or so, it can be anticipated that tax guidance in the form of regulations should be more readily available. This is a modified version of Mark A. Loyd’s regular column, Tax in the Bluegrass, “Updated Kentucky Tax Regulations on the Horizon” which appeared in Issue 4, 2017 of the Kentucky CPA Journal.