The Kentucky General Assembly on April 13 enacted H.B. 8 by overriding Governor Andy Beshear’s (D) veto, imposing sales and use tax on website design, development, and hosting services, marketing services, prewritten computer software access (SaaS), and numerous other services, effective January 1, 2023. The legislation also reduces the individual income tax rate beginning in 2023 depending on state revenue levels, updates IRC conformity, and establishes a limited tax amnesty program.
For consideration: The enacted legislation expands Kentucky’s sales tax to many business-to-business services, triggering new compliance obligations and costs for businesses selling or purchasing these services for use in Kentucky. Businesses should consider the consequences from updating the state’s IRC conformity date for the first time in three years (through December 31, 2021). Businesses also should consider amnesty program opportunities to resolve liabilities without penalty and subject to only one-half interest.
The legislation imposes sales and use tax on 35 newly listed services, effective January 1, 2023. These services include website design and development services and website hosting services. They also include SaaS services, defined as “the right of access to prewritten computer software where the object of the transaction is to use the prewritten computer software while possession of the prewritten computer software is maintained by the seller or a third party.”
In addition, the legislation imposes sales and use tax on marketing services, defined as “developing marketing objectives and policies, sales forecasting, new product developing and pricing, licensing, and franchise planning.”
Other newly taxable services likely to involve business-to-business transactions include:
Observation: Prior to enactment, the legislation was amended by the House to remove a proposed sales tax imposition on “advertising and graphic design services.” This would have imposed tax on “all activities involved in the strategy, conceptualization, development, production, and refinement of a master advertisement prior to its reproduction as tangible personal property or digital property for the purpose of display or other advertising uses,” and would have included placement of advertisements in print, broadcast, on billboards, or other media. As a result of this removal, these services remain nontaxable in Kentucky.
Excluded from the new services tax are gross receipts derived from (1) sales of the services in fulfillment of a lump-sum, fixed-fee contract or a fixed price sales contract executed on or before February 25, 2022; and (2) a lease or rental agreement entered into on or before February 25, 2022.
As under current law, it is presumed that all taxable services sold by any person for delivery or access in Kentucky are subject to tax until the contrary is established. The burden of proving the contrary is on the person who makes the sale of the newly taxable services unless the person takes from the purchaser a certificate to the effect that the service is:
The legislation provides for a 0.5% rate reduction for the tax year beginning on January 1, 2023, if by September 5, 2022 it is determined that certain revenue conditions have been met. Further rate reductions in the same amount may apply to each succeeding year depending on revenue conditions. However, the legislation also specifies that any further rate reduction for a succeeding year must be authorized by “a future action by the General Assembly.”
The legislation updates Kentucky’s fixed date conformity to the IRC in effect on December 31, 2021, effective for tax years beginning on or after January 1, 2022. The previous conformity date was the IRC in effect on December 31, 2018.
Observation: There have been several significant federal acts impacting corporate income tax enacted since December 31, 2018, including the CARES Act; the Consolidated Appropriations Act, 2021; and the American Rescue Plan Act of 2021. Two major changes in the CARES Act involve Section 163(j) and NOL relief provisions generally applicable to years prior to 2021. Because Kentucky’s new December 31, 2021 IRC conformity date is applicable to tax years beginning on or after January 1, 2022, it appears these two CARES Act relief provisions would not be deemed applicable in prior years. However, taxpayers should consider federal corporate tax changes enacted since December 31, 2018 and how they impact Kentucky taxable income starting with the 2022 tax year.
The legislation establishes a tax amnesty program beginning October 1, 2022 and ending on November 29, 2022. The program covers taxes, penalties, fees, or interest subject to the administrative jurisdiction of the department for tax periods ending on or after October 1, 2011 and prior to December 1, 2021. The program also includes certain federal obligations referred to the department for collection.
The program is open to eligible taxpayers, including those under audit or in a pending administrative or judicial proceeding. Amnesty program participants will qualify for a penalty waiver and relief from one-half of the interest otherwise due. The legislation includes post-amnesty penalties for failure to participate, ranging from 25% for underreporting tax to 50% for failure to file a tax return.
The legislation directs the department to begin procurement for services necessary to implement the tax amnesty program. If the department is unable to secure a successful bid from an amnesty service provider, the legislation directs the department to administer the amnesty instead during a “similar” 60-day period in 2023.