The Kentucky General Assembly signed House Bill 8 into law on April 13, 2022, overriding Gov. Andy Beshear’s veto. Effective January 1, 2023, the legislation enacts a one-time, 60-day-long tax amnesty program and imposes sales and use taxes on various services. HB 8 also updates Kentucky’s Internal Revenue Code (IRC) conformity date and reduces the individual income tax rate beginning in 2023, based on state revenue levels.
Tax Amnesty to Begin in October
The new tax amnesty program is expected to run from October 1 to November 29, 2022. It would apply to qualified tax liabilities or transactions applicable between October 1, 2011, and November 30, 2021. Participants will qualify for a penalty waiver and 50% abatement on interest. Eligible taxpayers who do not participate in the program will be subject to post-amnesty penalties of 25% of the underreported tax and 50% for failure to file a tax return. Any unpaid amnesty-eligible tax liability will be subject to a 2% increase on the statutory interest rate.
The Kentucky Department of Revenue is required to secure the necessary services to implement the program. If a successful bid from a service provider is not secured for the October/November 2022 amnesty period in a timely manner, the tax amnesty program will be moved to a similar 60-day period in 2023.
More Services Will See Sales and Use Taxes
Effective January 1, 2023, the new legislation expands Kentucky’s sales and use tax to numerous services. A few of them are:
- Prewritten computer software access services (SaaS)
- Website design and development services
- Website hosting services
- Photography and photo finishing services
- Marketing services
- Telemarketing services
- Public opinion and research polling services
- Lobbying services
- Executive employee recruitment services
- Testing services, except for medical, educational or veterinary
These are just a few examples. HB 8 imposes state sales and use taxes on more than 30 other types of personal and business services.
An important note: gross receipts from the sale of services in fulfillment of a lump-sum, fixed-fee contract, or a fixed-price contract executed on or before February 22, 2022, will be excluded from sales tax. A lease or rental agreement entered into on or before February 25, 2022, also will not be subject to sales tax.
Amendments to State Income Tax Law
The legislation allows for an individual income tax rate reduction of 0.5% for the tax year beginning January 1, 2023, if certain revenue conditions are met. The rate reduction is pending review, which will take place in September 2022. It will take effect if Kentucky’s reserve trust fund exceeds its general operations fund by 10%, and the balance in the general operations fund is equal to or greater than fiscal year appropriations plus the reduction in revenue from a 1% decrease in the income tax rate. Additional 0.5% rate reductions may apply in subsequent years depending on revenue conditions. Those reductions will require future legislative action.
Another amendment is an update to the state’s IRC conformity date. Kentucky is a fixed-date conformity state, so the legislation changes the IRC conformity date for Kentucky corporate and individual income tax from the IRC in effect on December 31, 2018, to the IRC in effect on December 31, 2021, for tax years beginning on or after January 1, 2022. The legislation does not adopt the federal exclusion for restaurant revitalization grants.
The new legislation significantly expands sales and use tax, so Kentucky businesses should check the list carefully to determine if they will owe sales and use tax on services that previously were not taxed. Retailers of new taxable services should update their POS systems to include the taxable codes and be prepared to charge tax on those services. In addition, those who purchase of the newly taxable services will need to review their transactions to determine whether they need to self-assess applicable use tax.
Our team is here to help you navigate Kentucky’s tax amnesty program, including where and how to apply for the program, when that information becomes available. Because the program runs for a short window of time, businesses need to be prepared in advance.