On April 13, 2022, the Kentucky General Assembly enacted HB 8 by overriding the veto of Governor Andy Beshear. The legislation contains several significant tax reform provisions. Most significantly, effective Jan. 1, 2023, the state will expand the sales and use tax base by imposing a sales and use tax on 35 additional services. Other highlights of HB 8 include: the establishment of a 60-day tax amnesty program, updating Kentucky’s conformity with the Internal Revenue Code, and conditional reductions in the individual income tax rate.
Kentucky Sales and Use Tax Expansion
Beginning Jan. 1, 2023, HB 8 broadens Kentucky’s sales and use tax base by taxing 35 additional services at the rate of six percent, including the following:
- Marketing services
- Telemarketing services
- Web site design and development services
- Web site hosting services
- Residential and nonresidential security system monitoring services
- Process server services
- Testing services, except testing for medical, educational, or veterinary reasons
- Specialized design services, including the design of clothing, costumes, fashion, furs, jewelry, shoes, textiles, and lighting
- Prewritten computer software access services
The Kentucky Department of Revenue (Department) will likely issue additional guidance defining these services on or before the Jan. 1, 2023, effective date.
Establishing a 60-day Tax Amnesty Program
HB 8 establishes a 60-day tax amnesty program to be administered by the Department. The program will be available to all taxpayers owing taxes, penalties, fees, or interest subject to the administrative jurisdiction of the Department. HB 8 allows the Department to issue a request for bid for a third-party service provider to administer the program. The program will begin on Oct. 1, 2022, and end on Nov. 29, 2022. If the Department is unable to secure a successful bid, then the Department will implement the amnesty program for 60 days during 2023. The program applies to liabilities for taxable periods ending or transactions occurring on or after Oct. 1, 2011, but prior to Dec. 1, 2021, and certain federal tax liabilities referred to the department for collection.
Updating Kentucky’s Conformity with the Internal Revenue Code
HB 8 updates Kentucky’s date of conformity with the Internal Revenue Code. The previous conformity date of Dec. 31, 2018, has been updated to Dec. 31, 2021, for taxable years beginning on or after Jan. 1, 2022.
Decrease in the Individual Income Tax Rate
HB 8 initiates an annual individual income tax rate reduction evaluation by the Department. In 2022, the Department will review certain “Reduction conditions” as defined by HB 8 compared to those existing during the previous fiscal year. The Department will then report its findings to the General Assembly by Sep. 5, 2022, along with a statement on whether or not conditions exist under the statute to reduce the rate beginning Jan. 1, 2023. If the conditions are met, the rate will be reduced from 5% to 4.5% beginning Jan. 1, 2023. The Department will implement an annual process to review and report future reduction conditions but cannot reduce the income tax rate without legislature passed by the General Assembly.
Taxpayers need to be on the lookout for additional guidance issued by the Department that may clarify and define many of the services made taxable by HB 8. Taxpayers need to make sure they understand how the state defines those services and then modify their internal compliance systems to make certain that the taxability determinations of their systems account for the expanded list of taxable services.
Taxpayers who would like to participate in the tax amnesty program should keep a close eye on the Department’s administration and the ultimate timing of the program.
For further additional information regarding this alert, please contact Geoff Christian and Sarfraz Bacchus.
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