April 6, 2022
Kentucky Legislature passes bill including conditional cuts in income tax rate, expansion of sales/use tax base and tax amnesty program
On March 31, 2022, the Kentucky General Assembly sent House Bill 8 (HB 8) to Governor Andy Beshear for his consideration. HB 8 would make several changes to Kentucky tax rules, including (1) updating Kentucky's conformity to the Internal Revenue Code, (2) implementing conditional reductions in the individual income tax rate, (3) expanding Kentucky's sales/use tax base, (4) establishing a tax amnesty program and (5) adopting a new tax incentive for remediating certain contaminated properties.
Internal Revenue Code (IRC) conformity
Kentucky's income tax law conforms to the IRC as of a fixed date. For tax years beginning on or after January 1, 2022, HB 8 would update Kentucky's date of IRC conformity to December 31, 2021. Kentucky would decouple, however, from the federal income tax treatment of restaurant revitalization grants as provided in the American Rescue Plan Act of 2021 (ARPA).1
Conditional reductions in individual income tax rate
The current Kentucky individual income tax rate is 5%. HB 8 would implement an annual-rate-reduction evaluation by the Kentucky Department of Revenue (Department). In 2022, the Department, with the assistance of the Kentucky Office of State Budget Director, would be required to review certain "reduction conditions" as defined in the statute2 compared to those existing during fiscal year 2020—2021. The Department would then have to report its findings to the General Assembly's Interim Joint Committee on Appropriations and Revenue and state whether conditions exist under the statute to reduce the tax rate beginning on January 1, 2023. The Department's report would be due to the committee by September 5, 2022. If the rate-reduction conditions are met, the individual income tax rate would decrease from 5% to 4.5% beginning January 1, 2023.
In future years, the Department would be required to conduct a similar evaluation of the reduction conditions, but additional individual income tax rate reductions could only occur by action of the General Assembly.
Sales and use tax base expansion
HB 8 would expand Kentucky's sales and use tax base by subjecting the following services to tax beginning January 1, 20233:
HB 8 does not define several of these services, so the Department would likely have to issue guidance on the treatment of these services before January 1, 2023.
HB 8 also would impose a 6% excise tax on gross receipts from:
Starting in 2023, HB 8 would impose an excise tax on the distribution of electricity in Kentucky by an electric vehicle power dealer for the purpose of charging electric vehicles in the state. The tax would have an initial base rate of three cents per kilowatt hour.
HB 8 would also impose a surtax on the distribution of electricity in Kentucky by an electric vehicle power dealer when the electric vehicle charging station is located on state property. The excise tax would have an initial base rate of three cents per kilowatt hour.
On January 1, 2024, and each January 1 thereafter, these tax rates would be adjusted by the change in the National Highway Construction Cost Index 2.0.
Tax amnesty program
HB 8 would establish a 60-day amnesty program for all taxes administered by the Department with the exception of certain real estate taxes and property taxes on motorboats and motor vehicles. The program would run from October 1, 2022 through November 29, 2022. HB 8 would allow the Department to issue a request for proposal for outside service providers to administer the amnesty program. If the Department could not procure a successful bid from an outside service provider, it would administer the amnesty program for 60 days during 2023.
Refundable credit for expenditures relating to qualifying decontamination property
HB 8 would establish a refundable and transferable credit against Kentucky individual income tax, corporate income tax and limited liability entity tax for qualifying purchases relating to qualifying decontamination property as defined by Kentucky law (i.e., property that contains hazardous substances, a pollutant or contaminant, or was affected by petroleum or petroleum-related products before its acquisition by the property owner (see K.R.S. 141.418)). The credit would equal the total expenditures made by the taxpayer for the decontamination or remediation of the qualifying decontamination property. The total credit awarded per qualifying decontamination property would be capped at $30 million and the maximum credit that could be used in a tax year could not exceed 25% of the approved credit.
The General Assembly passed HB 8 by supermajority votes in both legislative chambers. Accordingly, any veto by Governor Beshear would likely be overridden by the legislature, making it highly likely that HB 8 will become law. The expansion of the sales and use tax base appears similar to those enacted for a short time in Kansas and considered in other states, such as Ohio. Because the cuts to the income tax rate are conditional, they may not offset the proposed expansion of the sales and use tax base.
Taxpayers will be looking to the Department to issue guidance to define many of the services made taxable by HB 8.
Taxpayers should also monitor the developments around the amnesty program as the initiation of a program during calendar year 2022 depends on the Department successfully procuring a third-party service provider to administer the program.
1 The Kentucky General Assembly is separately considering HB 358, which would conform to the federal income tax treatment of restaurant revitalization grants as permitted under the ARPA.
2 Under HB 8, reduction conditions would occur when (1) the balance in Kentucky's budget reserve trust fund at the end of a fiscal year is equal to or greater than 10% of Kentucky's general fund revenues reduced for certain tobacco moneys for the year and (2) the general fund moneys at the end of the fiscal year are equal to or greater than general fund appropriations for that fiscal year plus the reduction of tobacco moneys resulting from a one percentage point reduction to the individual income tax rate for that fiscal year. See HB 8, Sec.1 (adding various definitions to K.R.S. 141.020(2)(a)).
3 See HB 8, Sec. 2 (amending K.R.S. 139.010).
4 See HB 8, sec. 11 (adding new K.R.S. ch. 138 (creating a new excise tax on peer-to-peer car sharing services and other similar vehicle services) and sec. 9 (amending K.R.S. 281.010 by adding certain definitions to the motor vehicle registration law).