Avalara: Kentucky lawmakers fight to tax services

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At the end of March, the Kentucky General Assembly adopted a measure to extend the sales tax to a multitude of services and to phase out personal income tax. Governor Andy Beshear then vetoed Bill 8 “Because it imposes new taxes that weaken public safety, harm vital industries, undermine incentives for economic development, and threaten Kentucky’s future economic security.” The General Assembly will have the opportunity to override the governor’s veto when it reconvenes on April 13.

HB 8 extends sales and use tax to an interesting assortment of services, including conferences and events, lobbying, and web hosting. It also creates an electric vehicle energy excise tax (3 cents per kilowatt hour), new registration fees for electric and hybrid vehicles, and a 6% gross receipts tax on car services and carpooling.

In addition to expanding sales tax, HB 8 reduces the personal income tax rate from 5% to 4% effective January 1, 2023. Income tax would be phased out over subsequent years , provided that the receipts of the general fund of the State exceed a certain level.

According to the measurement tax analysis, the income tax cut would cost the state about $530 million in fiscal year 2022-23 and more than $1 million in fiscal year 2023-24. Taxing more services would generate an additional $57.8 million in fiscal year 2022-23 and $149.7 million in fiscal year 2023-24. Still, Scott Peterson, vice president of government relations at Avalara, isn’t sure expanding the sales tax to services will generate enough money to offset the income tax cut.

the Kentucky Economic Policy Center said the measure would blow a “massive and growing hole” in the state budget: “HB 8 includes some modest revenue increases that will do nothing to offset the loss of revenue from the elimination of the revenue, which funds 40 percent of Kentucky’s budget.” And Governor Beshear thinks HB 8 would do more harm than good. “Other states that have significantly reduced income taxes have had their economies affected by these changes,” he explained in his veto message, using Kansas as an example.

However, the Tax Foundation is a supporter of reducing income tax rates and broadening the sales tax base. He believes Kentucky lawmakers took a “laudable first step” toward tax modernization in 2018 when he lowered the income tax from 6% to 5% and began tax certain consumer services.


Services taxed under HB 8

HB 8 expands sales tax base to approximately 35 services and industriesincluding:

  • Body modification services, including branding, ear pointing, piercing, scarification, tattooing, teeth pointing, tongue splitting, transdermal and subdermal implants, and any other modifications that are not is not necessary for medical or dental health

  • Bodyguard services

  • Timeshare Exchange Services

  • Cosmetic surgery services

  • Executive Search Services

  • Fax transmission services

  • Household moving services

  • Interior decoration and design services

  • Labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold as part of that transaction, including service calls and travel expenses

  • Labor to repair or alter clothing, shoes, watches or jewelry when no tangible personal property is sold in that transaction

  • Lapidary services including stone cutting, engraving and polishing

  • lobby services

  • Marketing services (developing marketing objectives and policies, sales forecasting, new product development and pricing, licensing and franchise planning)

  • Massage services, except when medically necessary

  • Photography and photo finishing services (including digital photography services; excluding photography services necessary for medical or dental health)

  • Private mailroom services (address barcode, delivery to postal services, pre-sorting mail and packages by postcode, private mailbox rental and tracking)

  • Private investigation services

  • Process server services

  • Parking services (including valet services and use of parking lots/structures; excluding parking services at an educational institution)

  • Personal background check services

  • Personal Fitness Training Services

  • Pre-written software access services

  • Opinion polling and research services

  • Tuition fees and recreational camp fees

  • Rental of space for banquets, conventions, entertainment events, meetings, parties, short-term business uses, short-term social events, weddings and repossession of tangible personal property

  • Residential and non-residential security system monitoring services

  • Road and travel services provided by auto clubs (e.g. American Automobile Association)

  • Social event planning and coordination services

  • Specialized design services including apparel, costume, fashion, fur, jewelry, lighting, footwear and textile design

  • Telemarketing services

  • Testing services, except testing for educational, medical or veterinary purposes

  • Website design and development services

  • Website Hosting Services

It’s an interesting list, both for what went wrong and what did. Although summer camps are taxed, accounting and legal services would remain exempt.

Moreover, the bill leaves some questions unanswered. Which massages are medically necessary and which are not? Would a music camp count as a recreational camp? Governor Beshear notes that many newly taxable services are not defined by the bill, “meaning many businesses may not be aware that their taxes are going up.” If the General Assembly overrides the governor’s veto, businesses will need to know which of the services they sell are subject to sales tax.


Would taxing more services have an impact on distance sellers?

The extension of sales tax to the above services should not impact remote sellers, as Kentucky Economic Tie Threshold is based solely on tangible personal property or digital property.

Some states, such as South Dakota, include services in their economic nexus threshold. For more information on state-specific requirements for remote sellers, see our state-by-state guide to economic ties laws.


New tax amnesty program

HB 8 also authorized the Kentucky Department of Revenue to implement a 60-day tax amnesty program in the fall of 2023. If the veto is overturned, the tax amnesty event would be administered by a third-party contractor.

Whatever happens with HB 8 in the next few days can serve as a barometer. More states plan to extend sales tax to services in 2022 and beyond.

Cover photo by Canva

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Avalara Inc. published this content on April 11, 2022 and is solely responsible for the information contained therein. Distributed by Audienceunedited and unmodified, on April 11, 2022 9:10:06 PM UTC.

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