The following are select recent federal and Kentucky developments that you may find interesting.
More Time for ERC Protests
The IRS has recently given taxpayers up to two years to administratively protest a disallowance letter related to the Employee Retention Credit (ERC), following calls from the National Taxpayer Advocate and other tax professionals, and announced in a webpage published September 19, 2024. This two year window is an extension of the typical 30 day administrative deadline to file a protest with IRS Appeals. But, be careful, taxpayers have a two year deadline from the date of the disallowance letter to bring suit in U.S. District Court or the U.S. Court of Federal Claims.
Chevron Overruled!
Many CPAs and attorneys who represent taxpayers used to pray for the Supreme Court to overrule Chevron U.S.A. Inc. v. Nat. Resources Def. Council, Inc., 467 U.S. 837 (1984). On June 28, 2024, their prayers were answered when the Court issued its opinion in Loper Bright Enterprises, et al v. Raimondo, 144 S.Ct. 2244 (2024)
Historically, Chevron deference provided a deferential standard in favor of agency interpretations of statutes. Under Chevron, a court would apply a two-part test to determine whether a challenged agency interpretation was entitled to the force of law: Is the Congressional intent clear? If so, the inquiry ends. But if silent or ambiguous, a court must defer to the agency’s interpretation if it is based on a permissible interpretation of the statute. The Court concluded, “Chevron’s presumption is misguided because agencies have no special competence in resolving statutory ambiguities. Courts do.” So, courts should “use every tool at their disposal to determine the best reading of the statute and resolve the ambiguity.” Makes perfect sense.
Undeserved Deference?
in Cincinnati Bell, Inc. v. Dep’t of Revenue, File No. K22-R-003 (Aug. 26, 2024), the Kentucky Board of Tax Appeals concluded that for tax year 2015, both the transactional and function tests must be applied to determine whether income is business income subject to apportionment or allocation. The KBTA found that Cincinnati Bell’s income from its sale of CyrusOne was not business income under the transactional test but was business income under the functional test so that the income was apportionable business income and subject to tax by Kentucky. Notably, the General Assembly has amended the statutes at issue, so the rules are different going forward. That said, one interesting aspect of the Cincinnati Bell case was the KBTA’s citation to Chevron, which was overruled by Loper Bright. Perhaps, this bodes well for Cincinnati Bell on appeal.
Tax Amnesty Stalemate
Although the General Assembly has passed legislation calling for a tax amnesty in 2022 and again in 2024, the Department of Revenue has not run the amnesty program. In 2022 and 2023 this was because the Department took the position that the General Assembly did not appropriate the funds to administer the program. In 2024, the Department’s stated reason is because the Governor line-item vetoed the amnesty, although the Attorney General has opined that the veto was invalid and without effect.
Fools Gold Bullion Sales Tax Exemption
Effective August 1, 2024, gold, silver, platinum, and palladium bullion are exempt from sales tax. Take a look at KRS 139.480(37). Here again, the Governor attempted to line-item veto the exemption, and the Attorney General has opined that the veto was invalid and without effect. Even so, a Department new release disclaims the exemption in the Kentucky Revised Statutes and directs taxpayer to continue to collect and remit sales tax. Will the General Assembly enact the same exemption in another bill this upcoming session? Will the Governor attempt to line-item veto it? Will the General Assembly override the Governor’s veto? Why should the General Assembly have to re-enact a statutory exemption that is set forth in the Kentucky Revised Statutes? What is a retailer to do? Should not retailers and consumers be able to rely on the Kentucky Revised Statutes?
Department’s Tax Proposals
The Department has announced several 2025 legislative proposals, including income tax deductions for medical cannabis businesses, eliminating the 200 transaction threshold for remote sellers, allowing the Department to refund income tax estimated payments prior to April tax return filings, resale exemptions for admission purchases, as well as some other proposals. These are certainly taxpayer friendly proposals. It is interesting to juxtapose these with the Department’s stance on tax amnesty and the bullion sales tax exemption.
Local “Income” Taxes
As the Kentucky individual income tax rate is now 4%, local occupational taxes on wages become even more significant. For example, in Jefferson County with a combined county rate of 2.2%, the rate can be 3.2% in some cities that impose their own 1% tax. Should not there be some attention to reducing local occupational tax rates? Could this mean local sales taxes?
This also puts the spotlight more on the compliance nightmare that Kentucky localities impose on businesses and employers with multiple filings and especially localities that interpret their taxes at odds with the statewide standards of KRS Chapter 67.
The state and localities should find a way to ease the compliance burden, especially for multijurisdictional filers, and localities should adhere to statewide standards.
No Reciprocity or Credits for Local Income Taxes
A Kentucky resident claimed credits for local taxes paid to Indiana based on Kentucky’s reciprocity agreement with Indiana, which shields Kentucky residents from Indiana state income tax liability and vice versa was the issue considered in Wall v. Dep’t of Rev., No. K23-R-003 (KBTA Dec. 21, 2023). The taxpayer earned wages from work performed in Indiana with amounts withheld as Indiana “local income tax” and amounts withheld as Kentucky “state income tax” and claimed a tax credit for the amounts withheld in Indiana local income tax for “tax paid to another state.” The KBTA affirmed the Department’s denial of the credit, concluding that the reciprocity agreement between Kentucky and Indiana applies only to state taxes, not local taxes, and the W-2s only showed local taxes were withheld.
If the Supreme Court takes up Zilka v. Philadelphia which poses the question of whether a credit must be given for all state and local taxes paid, perhaps a future challenge may yield a different result?
Why So Many Layers of Review?
While a multilayered chocolate cake may be nice to eat, multiple layers of review make it more costly for taxpayers disputing the administrative determinations of the Department in good faith. Indiana has a well-respected tax court and appeals from that court are discretionary to the Indiana Supreme Court. Ohio has a Board of Tax Appeals and non-property appeals are appealable directly to the Ohio Supreme Court. Kentucky could give taxpayers the option of bypassing the circuit court (which acts as an appellate court for administrative tax appeals) and appealing directly to the Court of Appeals. There are, of course, other options, but just this simple change could reduce taxpayers’ burdens.
Byzantine Property Tax Exemption Procedures
When a non-profit organization, such as a religious institution, educational institution or purely public charity, applies for a property tax exemption, should not the process be clear and efficient, especially for non-profits? Unfortunately, the process is less than clear and quite Byzantine. Non-profits should not be subjected to uncertain and inefficient processes in trying to advocate for exemptions due them. The General Assembly should streamline and provide for a straightforward process to allow for a direct appeal to the KBTA or circuit court and to automatically hold each property tax year in abeyance pending the ultimate determination after judicial appeals are completed.
Tangible Property Tax Manufacturing Machinery Exemption
At issue in Dep’t of Rev. v. Ralcorp Frozen Bakery Products, Inc., 2023-CI-00193 (Ky. Franklin Cir. Ct. Jan. 27, 2024), on appeal, No. 2024-CA-0114-MR (Ky. App.) is the scope of the local tax exemption and lower state rate for manufacturing machinery. Ralcorp, a bulk manufacturer of food products, operates a food manufacturing plant. The KBTA concluded that the manufacturing process includes palletizing and labeling, as the products are not considered saleable until these steps are completed. The Franklin Circuit Court affirmed, explaining that the test is not whether the manufacturing process ends when the product can be eaten, but when the product is ready for sale, finding palletization and labeling were necessary steps for Ralcorp’s manufacturing process, which ends when the packaged products are packed on pallets, secured with shrink wrap, and labeled with an SSCC barcode, as the customers will not accept the product until these steps have been completed. Seems pretty straightforward, but the Department has appealed to the Court of Appeals.
16th Amendment Now in Vogue
A 16th Amendment argument was at issue in Moore v. United States, 144 S.Ct. 1680 (2024). The taxpayer paid the transition tax of Internal Revenue Code §965, which required U.S. shareholders to pay a tax on untaxed foreign earnings of certain foreign corporations as if those earnings had been repatriated and requested a refund, arguing it was unconstitutional because the taxpayer did not realize income under the 16th Amendment, which provides Congress with the authority to collect taxes on “income, from whatever source derived”. The Supreme Court held that the mandatory repatriation tax does not exceed Congress’s constitutional authority. The interesting thing about this case is that the Supreme Court granted certiorari and reviewed it!
“It’s Not a Prophecy, It’s A Story.” Paul Atreides in Dune: Part Two (2024)
There were lots of interesting federal and Kentucky developments in 2024, including two Supreme Court tax cases and many Kentucky state and local tax issues. These are only a few.
