I. 2024 Legislative Update
The Kentucky 2024 regular legislative session saw a number of important tax law changes.
Tax Amnesty
House Bill 8 (“HB 8”) provides for a tax amnesty for certain Kentucky taxes with a waiver of all penalties and 50% interest. The amnesty program will occur in 2024 if the Kentucky Department of Revenue (“KDOR”) can procure a third-party to administer, otherwise KDOR must administer an amnesty program internally in autumn of 2025.1
Notably, KDOR did not run the amnesty provided for in 2022 or 2023 because it argued that the General Assembly did not appropriate funds to administer the program. The General Assembly again did not appropriate such funds in HB 8, leading to Governor Beshear vetoing the parts of HB 8 containing the Tax Amnesty program on April 9, 2024, noting that “[t]he Department of Revenue estimates that it will cost at least $5 million to implement.” Nevertheless, the General Assembly ignored the Governor’s veto and sent HB 8 for enrollment to the Secretary of State.2
According to a DOR new release, “the Department of Revenue shall not implement the tax amnesty program appearing in Sections 43 through 47 of HB 8 vetoed by the Governor.”
Annual KDOR Report to General Assembly
HB 8 also requires that KDOR must submit an annual report to the Legislative Research Commission and the Interim Joint Committee on Appropriations and Revenue on October 1, 2024, and October 1 of each year thereafter, summarizing each tax law change enacted during year organized by bill number and outlining KDOR’s implementation of each change, as it relates to required IT modifications, development or modification of tax forms, taxpayer education efforts, administrative regulations, personnel, and suggested corrections or improvements.3
KDOR Transparency
Continuing Kentucky’s trend of improved tax transparency, HB 8 requires KDOR to publish administrative writings, including final rulings, manuals and training procedures, presentations, technical advice memoranda, general information letters, private letter rulings, and tax forms, redacted to protect taxpayer-specific information, on its official website promptly after issuance or finalization, but no more than one hundred twenty (120) days thereafter.4
IRC Update
The reference to the Internal Revenue Code has been updated to January 1, 2024, subject to certain exceptions.5
Corporation Tax Combined Group Reporting Deduction Delay
HB 8 delays the combined group reporting deduction from the first taxable year beginning on or after January 1, 2024 to January 1, 2026.6
New Bullion Sales Tax Exemption
Effective August 1, 2024, gold, silver, platinum, and palladium bullion are exempt from sales tax.7 The Governor attempted to line-item veto the exemption. But, in Ky. OAG 24-06, the Attorney General opined that the Governor’s veto was invalid and without effect. (May 20, 2024).8 According to a KDOR news release, “[Due to the governor’s veto which the General Assembly did not override,] [t]he sale, use, storage or other consumption of currency or bullion currency continues to be subject to the sales and use tax. Taxpayers should continue to collect and remit the sales and use tax as provided under KRS Chapter 139.”
Increased Small Retailer Gross Receipts Exemption for Certain Taxable Services
Pursuant to HB 8, retailers making sales solely of services that became taxable after July 1, 2018, or January 1, 2023, and with gross receipts under $12,000 in 2024, are not required to maintain an active sales tax permit for 2025 if sales are not expected to exceed $12,000. However, if gross receipts exceed $12,000 in the first year, all gross receipts over $12,000 are taxable.9
New Data Center Equipment Sales Tax Exemption
Effective July 15, 2024, there is a new exemption under KRS Chapter 139 for the sale, purchase, use, storage, consumption, installation, repair, and replacement of data center equipment. The term “data center equipment” includes a broad scope of items like servers, routers, connections, monitoring.10
New Qualified Broadband Investment Income Tax Credit
To encourage the expansion of broadband services in Kentucky, a qualified broadband investment tax credit against Kentucky income tax and limited liability entity tax is available in the amount of sales tax actually paid on qualified broadband investment, subject to certain limitations for taxable years beginning on or after January 1, 2025, but before January 1, 2029. The credit must be applied for by December 31 (starting December 31, 2025), and KDOR will notify taxpayers of approval and amount awarded by February 1; the application is not confidential taxpayer information and may be subject to disclosure. The Department will report information regarding the credit to the General Assembly.11
Property Tax Classification of Pipelines
House Bill 122 (“HB 122”) amends the definition of real property to include pipelines for property assessed on January 1, 2024 and 2025. Notably, this effectively reverses Department of Revenue v. Marathon Pipe Line, LLC, 653 S.W.3d 104 (Ky. App. 2022), which held that Marathon’s pipeline was tangible personal property.12
II. Executive & Administrative Updates
KDOR has provided guidance on recent tax law changes and other administrative updates in Kentucky Sales Tax Facts (December 2023), and Kentucky Sales Tax Facts (June 2024), which can be accessed at https://revenue.ky.gov/News/Publications/Pages/Sales-Tax-Facts.aspx. Additional guidance may be found at TaxAnswers.ky.gov.
Tax Treatment of Non-Profits: Purchases vs. Receipts13
Recognizing that legislative amendments to sales tax law in recent years have changed the tax treatment of non-profit groups in several ways, KDOR guidance clarifies that even though an entity may be exempt from sales and use tax on certain purchases, non-profits are not exempt from tax liability on its receipts from the sale of taxable services . Except for specific school-related groups, if a non-profit or governmental entity receives more than $6,000 in receipts annually from sales of any of the newly taxable services individually or in any combination, the non-profit must register, collect, and remit sales tax.
Extended Warranty Services14
KDOR discussed the significant changes to the definition of “extended warranty services” in KRS 139.010, effective January 1, 2023, which now includes “prewritten computer software access services” as a type of warranty contract subject to sales and use tax. KDOR specified that the new definition also expands the meaning to include contracts covering all real property, tangible personal property, and digital property, regardless of whether the property itself is subject to sales and use tax or exempt. Accordingly, KDOR advised contractors, who are normally treated as service providers not liable for tax on their receipts, to understand that payments from clients for extended warranty contracts are now taxable receipts subject to the 6% sales and use tax.
Sports Wagering Excise Tax15
KDOR issued guidance on the sports wagering excise tax, effective June 29, 2023, which imposes a 9.75% excise tax on the adjusted gross revenue on wagers placed at the licensed track and a 14.25% excise tax on the adjusted gross revenue on wagers placed online via websites, mobile applications, or other off-site technology approved by the Kentucky Horse Racing Commission. The tax is due on or before the 20th day of the next succeeding calendar month from when the reportable wagers occur and are filed and paid electronically. Negative adjusted gross revenue will carry over as a credit to the return for the subsequent month; however, the credit amount shall not be carried over in any period more than twelve (12) months after the month in which the amount carried over was originally due. Promotional bet credits are included in the total sum of wagers but are not included in winnings.
Electric Vehicle (EV) Power Tax16
KDOR stated that pursuant to the EV Power Tax, enacted during the 2022 session and amended during the 2024 session (HB 122, Section 1), public electric vehicle charging stations are subject to a $0.03 per kilowatt hour excise tax with an additional $0.03 per kilowatt hour surtax on power distributed by electric charging stations located on state property. These rates apply to power distributed on or after January 1, 2024, and the person who owns or leases the EV charging station is the party responsible for reporting and paying the tax, including non-profit organizations and state and local governmental entities but not federal entities. Only electric vehicle charging stations with a charging capacity greater than 20 kilowatts are subject to the electric vehicle power excise tax. The tax is still due even if there is no charge for the power distributed from the charging station unless the charging station was installed prior to July 1, 2022.
Private charging stations are not subject to the tax unless the EV charging station is available to general public vehicular traffic. The KDOR’s provided non-exclusive examples of restricted access EV charging stations, such as those requiring a special card or code in order to access, or those with locked gates or other barriers limiting access. Charging stations reserved for tenants only are considered private charging stations. However, if the charging stations located at multi-family housing units are accessible to general public vehicular traffic, the electricity distributed is taxable even though the stations are designated for residential use.
Gross Receipts Exemption for Taxable Services17
Pursuant to HB 8 exemption threshold for gross receipts from the sale of a service listed under KRS 139.200(2)(g) to (ax) increased from $6,000 i to $12,000. KDOR explains that retailers that make sales solely of services that became taxable effective July 1, 2018, or January 1, 2023, which do not have gross receipts over $12,000 during calendar year 2024 are not required to maintain an active sales tax permit for calendar year 2025 if sales are not expected to exceed the $12,000 threshold during 2025. However, once a seller crosses the $12,000 threshold, all gross receipts over $12,000 are taxable in that calendar year; and, in subsequent calendar years, all gross receipts from sales by the retailer are subject to tax. KDOR also states that this exemption does not apply to retailers engaged in the business of selling tangible personal property, digital property, or services listed in subsection KRS 139.200(2)(a) to (f), or to retailers with gross receipts from sales in any combination of taxable services, tangible personal property or digital property.
Data Center Equipment18
HB 8 introduced a new exemption under KRS Chapter 139 for the sale, purchase, use, storage, consumption, installation, repair, and replacement of data center equipment, effective July 15, 2024. KDOR describes the broad scope of items included in the term “data center equipment,” such as servers, routers, connections, monitoring and security systems, fiber optic cabling and network equipment, computer software, and other tangible personal property essential for operating the data center, that may be purchased exempt from sales and use tax following preliminary approval of the project. However, excluded from the exemption are construction equipment and building and construction materials that are to be permanently incorporated as an improvement to real property, electricity used by the facility, and administrative office equipment. Eligibility for the sales tax exemption requires the data center meet the requirements of and be approved by the Kentucky Economic Development Finance Authority (KEDFA). Further, the exemption is limited to sites within a consolidated local government having a population equal to or greater than five hundred thousand.
KDOR is developing a new certificate of exemption for purchases of data center equipment, which it will issue to a company after the company receives approval or preliminary approval through KEDFA. A preliminarily approved company must report on a fiscal year basis to KDOR an itemized schedule of data center equipment claimed and purchased tax free, beginning September 1, 2025, and on or before every September 1st thereafter.
Labor and Installation Charges19
KDOR guidance discussed how the expanded definition of taxable extended warranty services impacts labor and installation charges, noting that all charges for extended warranty services are taxable regardless of the taxable nature of the property being services. Charges not under an extended warranty contract for the installation of fixtures to real property or for labor to repair fixtures to real property are not part of gross receipts subject to sales tax. However, KDOR states that those labor charges are taxable if the installation labor is billed as the provision of extended warranty services.
III. Trends to Watch
A. Nexus and Telecommuting
For employers employing Kentucky residents and/or nonresidents who reside in states with which Kentucky has a reciprocal agreement, they will not need to change their current withholding practices during the period when these employees are working from home. KDOR will continue reviewing Kentucky income tax nexus determinations on a case-by-case basis, though companies should continue to keep in mind federal Public Law 86-272, which prohibits states from imposing income tax on a business’s income derived from interstate commerce if the business has only limited business activity in the state.
B. Continued Reduction of the Individual Income Tax Rate and Expansion of Sales Taxes to Services
Kentucky has joined a growing number of states seeking additional tax revenue by expanding its sales tax base to services. Kentucky has reduced its individual income tax in recent years (currently at 4%), and has sought to fill the gap in revenue by looking to services on which it can levy its sales tax. Kentucky greatly expanded the number of services subject to sales tax effective January 1, 2023, however, there was no similar expansion during the 2024 Legislative session. Kentucky may seek to continue reducing its individual income tax rate by further expanding the list of taxable services in future years.
C. Property Tax Assessment Reduction Opportunities
As interest rates have greatly risen over the last year and both residential and commercial real estate values have declined relative to their upward of the last several years, there may be opportunities for certain property owners to seek a reduction in their property tax assessments. Property owners may wish to review recent sales of comparable properties to see if their current assessment is in line with the market. Commercial real estate owners should review their cap rate and income stream, particularly if their operating expenses have grown, their property remains vacant (for example, in office buildings whose tenants have not returned after COVID-19), or their income stream has otherwise been affected by the economy. Kentucky property tax season begins in May, so property owners should begin reviewing their assessments now.
D. Pass Through Entity Tax Election
During the 2023 legislative session, the General Assembly enacted legislation that provided for a refundable pass-through entity tax credit equal to 100% of the entity owner’s proportionate share of the tax paid based on the pro rata share of the owner’s income from the entity. With the SALT cap deduction under the Tax Cuts and Jobs Act (“TCJA”) set to expire December 31, 2025, the General Assembly may reevaluate Kentucky’s Pass Through Entity Tax election in future years.
E. Limited Liability Entity Tax
Kentucky’s limited liability entity tax (“LLET”) imposes a tax on every business that is protected from liability by the laws of the state, including corporations, LLCs, S-Corporations, limited partnerships, and other types of businesses.20 The LLET has been a subject of discussion over the past few years and legislation has been introduced to provide targeted relief or full repeal. During the 2024 session House Bill 55 (HB 55) was introduced to sunset the LLET for taxable years beginning on January 1, 2025, and House Bill 120 (HB 120) was introduced to limit LLET’s application only to entities with gross receipts of $100,000 or more. Both bills died in committed. The General Assembly may continue to evaluate Kentucky’s LLET in future years and consider changes similar to HB 55 and HB 120, or alternatives such as shifting the LLET’s minimum fee to the annual organization fee paid to the Kentucky Secretary of State.
F. Local Tax Uniformity
Kentucky has historically been dependent on taxes based on income as well but has recently moved away from income-based taxes to become more competitive. However, this competition might be undermined by the prevalence of occupational license taxes on wages and net profits imposed by local tax districts in Kentucky.21 With hundreds of local tax districts in Kentucky imposing occupational license taxes and the trend toward hybrid work and remote work, the burden of preparing multiple tax returns and filing in multiple tax districts has increased markedly. Not surprisingly, business taxpayers, especially small businesses, face major challenges in trying to comply with local occupational license taxes in Kentucky. Kentucky may consider enacting legislation to promote local tax uniformity in future years, such as centralized collection of local taxes.
IV. Select Case Updates
Dep’t of Rev., Fin. and Admin. Cabinet v. Carriage Ford, Inc., No. 2022-CA-0231-MR (Ky. App. July 14, 2023), discretionary review denied, No. 2023-SC-0448-D (Ky. Mar. 6, 2024) – Motor Vehicle Usage Tax Refund
Carriage Ford (Taxpayer) is an Indiana car dealership that sells cars to Kentucky residents. Taxpayer paid Kentucky’s motor vehicle usage tax for Kentucky customers. In 2015, the Indiana Department of Revenue audited Taxpayer and found Taxpayer owed Indiana sales tax for cars sold to Kentucky residents who took possession in Indiana. Taxpayer paid the Indiana taxes and requested a refund from KDOR, which denied the refund. The Court of Appeals affirmed the Franklin Circuit Court which remanded the case to the now KBTA with direction that the requested refund of tax and interest be granted to Carriage Ford pursuant to KRS 134.580. The Supreme Court of Kentucky denied discretionary review on March 06, 2024.
The authors’ law firm represents Carriage Ford in this action.
Dunn v. Solomon Found., Nos. 2022-CA-0399-MR and 2022-CA-0401-MR (Ky. App. Apr. 28, 2023), aff’g, No. 21-CI-00191 (McCracken Cir. Ct. Oct. 12, 2021), discretionary review granted, Nos. 2023-SC-0235 and 2023-SC-0236 (Ky. Oct. 18, 2023) – Religious Exemption
The Solomon Foundation (Solomon) is an institution of religion that exists to propagate a specific religious doctrine and to financially support this cause. Solomon owns a Church Property in McCracken County, leased to local churches, and sought a property tax exemption as a religious institution under Section 170 of the Kentucky Constitution. The McCracken PVA denied the application, asserting that the same institution of religion must both own and occupy the property, and, that Solomon is not religious. The Court of Appeals affirmed the McCracken County Circuit Court and held that Solomon is a religious institution and that the subject property is “owned and occupied” by “institutions of religion” and therefore is entitled to the tax exemption. Both PVA and the Department of Revenue, which intervened at the Circuit Court, sought discretionary review, which the Supreme Court of Kentucky granted on October 18, 2023.
The authors’ law firm represents The Solomon Foundation in this action.
O’Neil v. Solomon Found., No. 2019-CA-1619-MR (Ky. App. Apr. 28, 2023), aff’g, No. 19-CI-01991 (Fayette Cir. Ct. June 14, 2024) – Administrative Procedure
The Kentucky Court of Appeals affirmed a circuit court judgment dismissing The Solomon Foundation’s declaratory judgment action on procedural grounds, finding that once the foundation pursued administrative relief through property tax appeal procedures, the foundation was required but failed to exhaust its administrative remedies prior to filing suit in the circuit court.
The authors’ law firm represents The Solomon Foundation in the appeal to the Court of Appeals.
Dep’t of Rev., Fin. and Admin. Cabinet v. Marathon Pipe Line, LLC, No. 2021-CA-0626-MR (Ky. App. May 13, 2022), discretionary review denied, 2022-SC-0233 (Ky. Oct. 12, 2022) – Tangible Personal Property Tax
Marathon Pipe Line, LLC (Marathon) is a public service corporation (PSC) that owns or leases thousands of miles of pipeline throughout the United States, including a 265-mile long tract from Owensboro to a Catlettsburg refinery located in an activated Foreign Trade Zone (FTZ).
At issue in this case is whether the pipeline was real property or tangible personal property; tangible personal property located in an FTZ is taxed at a very favorable rate. The Department of Revenue, Finance and Administration Cabinet, Commonwealth of Kentucky (the Department) assessed the pipeline as real property. The Franklin Circuit Court affirmed KBTA/KCC’s finding that Marathon’s pipeline is tangible personal property. The Department appealed to the Court of Appeals, which agreed with KBTA/KCC and the circuit court, on the rationale that the pipeline was: not annexed to the realty as it is moveable; not adapted to the use or purpose of the land above it; and intended by the parties to be moved and not a permanent accession to the land. The Court of Appeals also found that the Department’s treatment of pipelines was not uniform, evidenced by its classification of MarkWest Energy’s pipeline as tangible personal property. The court also noted that 103 KAR 8:090 indicates that a transmission line should be classified as real property, but another type of pipeline used to transport crude oil (a gathering line) should be classified as personal property.
Notably, however, House Bill 122 (“HB 122”) effectively reverses this case by amending the definition of real property to include pipelines for property assessed on January 1, 2024 and 2025.22
Century Aluminum of Ky. v. Dep’t of Revenue, No. 19-CI-00424 (Franklin Cir. Ct. Feb. 3, 2020), affirmed 2020-CA-0301-MR (Ky. App. July 9, 2021), reversed and remanded, 2021-SC-0300 (Ky. December 15, 2022), petition for rehearing denied (Mar. 23, 2023) – Sales Tax – Manufacturing Supplies Exemption
The Kentucky Supreme Court held that certain items purchased by Century Aluminum and consumed in its manufacturing process were tax-exempt supplies, not taxable repair, replacement or spare parts.
The Court acknowledged that “[c]ategorization of an item as a supply is…at the heart of this dispute.” In reversing the Court of Appeals, the Kentucky Supreme Court agreed with the KCC’s ultimate conclusion that a distinguishing difference between a tax-exempt supply and a taxable part is whether the tangible personal property is consumed in the manufacturing process and has a useful life less than one year,” noting that its decision was “based upon the plain language of the statutes.” Citing KRS 139.470(10), he Court explained that in order to be categorized as a supply, an item must be (i) tangible personal property that is (ii) consumed when used in the manufacturing or industrial processing and is directly used in such processing, and (iii) having a useful life of less than one year. The Court also referenced the Amici Curiae Brief filed by the Kentucky Association of Manufacturers and joined by the Kentucky Chamber of Commerce, noting that a distinction could be drawn between materials and supplies and parts, that distinction being that materials and supplies are designed and intended to be used up in the manufacturing process and parts simply wear out. The Court therefore agreed with the KCC’s ultimate finding that the items were categorized as tax exempt because all items at issue were tangible personal property that had direct use in manufacturing in a manufacturing facility and had a useful life of less than one year.
In June of 2023, KDOR issued guidance in response to the decision, stating that tangible personal property that qualifies as an exempt supply but for the “repair, replacement, or spare part” exclusion will qualify as an exempt supply. If all other criteria for the exemption are met, the items consumed in the manufacturing process are exempt even if performing a maintenance function. Based on this expanded interpretation of the exemption, the KDOR will continue to make determinations on a case-by-case basis.
The authors’ law firm represents amici in this action.
Louisville/Jefferson County Metro Revenue Commission v. Ventas, Inc., No. 19-CI-000899 (Jefferson Cir. Ct. Feb. 8, 2021), denial of Metro Revenue’s motion to dismiss on Sovereign Immunity grounds affirmed, No. 2021-CA-0235-MR (Ky. App. Feb. 11, 2022), on remand, No. 19-CI-000899 (Jefferson Cir. Ct. Oct. 25, 2023), granting declaratory judgment for alternative apportionment – Occupational License Tax/Sovereign Immunity.
Ventas, Inc. (“Ventas”) is a national healthcare real estate investment trust (“REIT”) that transacts business in multiple jurisdictions, but is headquartered in Louisville, Kentucky. In 2019, Ventas filed a declaration of rights action seeking an order that it is entitled a variance from the standard apportionment formula used by Metro Revenue in calculating occupational license tax. Metro Revenue moved to dismiss the case on the grounds of sovereign immunity, arguing that implicit in Ventas’s declaratory judgment action was a refund claim that implicated sovereign immunity because it presented a harm to state or government resources, which the Jefferson Circuit Court denied. The Kentucky Court of Appeals affirmed, holding that the only claim presented in Ventas’s complaint is for declaratory judgment: whether Ventas was entitled to relief in the form of an alternative and equitable apportionment, which did not impinge upon the Metro Revenue’s governmental immunity.
On remand, the Jefferson County Circuit Court granted Ventas’s request for an apportionment variance, holding that Ventas successfully made an as applied constitutional challenge. The Court determined that Metro Revenue’s apportionment formula met the internal consistency test because Ventas would not be taxed on more than all of its income if every jurisdiction used the same formula; however, it failed the external consistency test because it did not actually reflect a reasonable sense of how income was generated.
The authors’ law firm represents the taxpayer in this action.
Foresight Coal Sales, LLC v. Chandler, 60 F.4th 288 (6th Cir. 2023), petition for writ of certiorari denied, 144 S.Ct. 80, 217 L.Ed.2d 15 (Oct. 2, 2023) – Coal Severance Tax/Commerce Clause
The Sixth Circuit Court of Appeals held that Kentucky Senate Bill 257 (“SB 257”) unconstitutionally favors in-state coal over out-of-state coal, in violation of the dormant Commerce Clause. SB 257 directs the Public Service Commission (“PSC”) to evaluate the cost of coal after subtracting any severance tax paid. Foresight Coal Sales, LLC (“Foresight”) sued the PSC and sought a preliminary injunction to block SB 257’s implementation. The Sixth Circuit reasoned that SB 257 differentiates treatment between severance-taxing states based on the amount of tax, causing out-of-state coal to be more expensive. The PSC’s offered purpose for SB 257, to “even out the playing field,” is itself discriminatory and violates the principles found in the Supreme Court of the United States’ (“SCOTUS”) dormant Commerce Clause jurisprudence. Finding that Foresight was likely to succeed on the merits, the Court remanded the case to the lower court to analyze the remaining three preliminary injunction factors. The PSC filed a writ of certiorari with the United States Supreme Court, which declined review of Foresight.
Lowe’s Home Centers, Inc. v. Montgomery Co. PVA, No. 22-CI-90079 (Montgomery Cir. Ct. Feb. 7, 2024), on appeal, No. 2024-CA-0307 (Ky. App. Mar. 6, 2024) – Property Tax
Lowe’s Home Centers, Inc. (Lowe’s) brought a real property tax appeal in Montgomery County for a big box store owned in fee simple and occupied by Lowe’s. Lowe’s relied on an MAI-designated expert witness who appraised the properties and testified as to the appraisal report. The PVA in Montgomery County called three witnesses. The KBTA held for the PVA, finding that Lowe’s’ evidence failed to rebut the presumption in favor of the PVA’s assessment value and that the PVA’s evidence was more persuasive, and ultimately determined that the Lowe’s appraiser did not use comparable properties to develop her valuation. T Lowe’s appealed.
The Montgomery Circuit Court affirmed the KBTA, finding that it’s rejection of taxpayer’s expert witness, appraisal report and testimony was neither arbitrary nor capricious and was supported by substantial evidence because it provided detailed explanations for its findings and were specific to each element of the reports prepared by taxpayer’s and PVA’s expert witnesses. Furthermore, the evidence was not so compelling that no reasonable person could fail to have been persuaded by it.
Lowe’s submitted an appeal to the Kentucky Court of Appeals, where the case is currently pending.
Grand Lodge of Kentucky Free & Accepted Masons v. Plummer, No. 2023-CA-1080-MR, 2024 WL 2983182 (Ky. App. June 14, 2024) (rehearing requested) – Property Tax
The case is an appeal from the Kenton Circuit Court’s judgment affirming the ad valorem tax assessments of the residents of Spring Hill Village, a retirement community owned by a tax-exempt entity, Grand Lodge of Kentucky Free and Accepted Masons. The Court held that the residents’ possessory interests in the residential units are taxable leasehold interests subject to ad valorem taxation and that the fair market value of those interests is calculated by subtracting the fair market value of the property as a whole if sold subject to the lease from the fair market value of the land as a whole if sold free and clear of the lease.
Dunn v. Saratoga, LLC, 685 S.W.3d 1 (Ky. App. 2024) – Property Tax
Property owners purchased property in Paducah and constructed commercial buildings on them, but the former PVA did not reassess the properties as required by law. The current PVA issued omitted property assessments with penalties and interest. Pursuant to KRS 132.290(1), “Omitted property,” may be retroactively assessed and subjected to ad valorem taxes and penalties for up to five prior years .but the Board of Assessment Appeals (BAA), the Kentucky Board of Tax Appeals (KBTA) and the Circuit Court ruled in favor of the taxpayers, holding PVA’s omitted property assessments were erroneous because the taxpayers had properly listed the parcels as required by KRS 132.220 when they recorded the deeds in the county clerk’s office and the undervaluation of the parcels was due to the failure of the prior PVA to perform their statutory duties and not due to any violation on the part of the taxpayers. The Court of Appeals affirmed, finding that the improvements were not omitted property as defined by KRS 132.290 and that retroactive taxation was not authorized for undervalued property.
Dep’t of Revenue 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.) – Manufacturing Machinery Exemption
Ralcorp, a bulk manufacturer of food products, operates a food manufacturing plant in Louisville, Kentucky, where it produces items like frozen pancakes and biscuits for major restaurants and retailers. Ralcorp asserted that the machinery it uses for palletizing, shrink wrapping, and labeling food products and necessary to comply with federal and state laws should be considered part of “machinery actually engaged in manufacturing,” which would make it eligible for a lower state tax rate and local tax exemption for tangible personal property tax purposes. The KDOR disagreed.
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. The Circuit Court found that 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.
KDOR appealed to the Kentucky Court of Appeals, where briefing is underway.
Wall v. Fin. & Admin. Cabinet, Dep’t. of Rev., No. K23-R-003, 2023 WL 9017165 (Ky. Bd. Tax. App. Dec. 21, 2023) – State Income Tax Reciprocity
In this case, Kentucky residents 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. In 2018, 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.” On Taxpayer’s 2018 Kentucky income tax return, the Taxpayer claimed a tax credit for the amounts withheld in Indiana local income tax for “tax paid to another state.”
The Kentucky Board of Tax Appeals (“KBTA”) affirmed the Kentucky Department of Revenue’s (“KDOR”) 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. The KBTA also upheld penalties for failure to exhaust administrative remedies and interest.
September _, 2024
1See HB 8, Sections 43, 44, 46, & 47 (KY tax amnesty program extension into 2024, 2025). See KRS 131.435(1) (“The department and the Finance and Administration Cabinet shall begin procurement for services necessary to implement the tax amnesty program….”); KRS 131.400(3) (“…a tax amnesty program shall be conducted for a period of sixty (60) days, beginning on October 1, 2024, and ending on November 29, 2024….”); (4) (“If the department is unable to secure a successful bid for the procurement of services under KRS 131.435, the department shall implement a tax amnesty program during a sixty (60) day period similar to the period established in subsection (3) of this section, except that the sixty (60) day period shall be held during the calendar year 2025.”).
2Veto Message from the Governor of the Commonwealth of Kentucky regarding House Bill 8 of the 2024 Regular Session, (available at https://apps.legislature.ky.gov/record/24rs/hb8/veto.pdf); but see Ky. OAG 24-06 (May 20, 2024) (Opinion of the Kentucky Attorney General that the Governor’s veto was invalid and without effect) (available at https://www.ag.ky.gov/Resources/Opinions/Opinions/Opinion%20of%20the%20Attorney%20General%2024-06.pdf).
3HB 8, Section 4; KRS 131.132(1) (“The department shall submit an annual report to the Legislative Research Commission and the Interim Joint Committee on Appropriations and Revenue on October 1, 2024, and October 1 of each year thereafter.”).
4HB 8, Sections 22-27; KRS 131.010(17) (defining administrative writings) KRS 131.020(1)(b)(5)-(6) (“Office of Tax Policy and Regulation…. shall be responsible for: … 5. Publishing administrative writings on its official website promptly after issuance or finalization, but no more than one hundred twenty (120) days thereafter; 6. Publishing all tax forms and instructions to those tax forms on its official website….”).
5HB 8, Section 14; KRS 141.010(21) (“‘Internal Revenue Code’ means for taxable years beginning on or after January 1, 2024, the Internal Revenue Code in effect on December 31, 2023, exclusive of any amendments made subsequent to that date, other than amendments that extend provisions in effect on December 31, 2023, that would otherwise terminate”).
6HB 8, Section 16; KRS 141.039(2)(d)(5).
7HB 8, Sections 33, 34; HB101; SB 105; SB 121. (effective August 1, 2024); KRS 139.480(37)(a) (“Any other provision of this chapter to the contrary notwithstanding, the terms “sale at retail,” “retail sale,” “use,” “storage,” and “consumption,” as used in this chapter, shall not include the sale, use, storage, or other consumption of: … (37)(a) Currency or bullion.”); see also KRS 139.480(37)(b) (defining “Bullion” and “Currency”).
8Veto Message from the Governor of the Commonwealth of Kentucky regarding House Bill 8 of the 2024 Regular Session, (available at https://apps.legislature.ky.gov/record/24rs/hb8/veto.pdf); Ky. OAG 24-06 (May 20, 2024) (available at https://www.ag.ky.gov/Resources/Opinions/Opinions/Opinion%20of%20the%20Attorney%20General%2024-06.pdf).
9HB 8, Section 10 (Effective January 1, 2025); KRS 139.470(23)-(24).
10HB 8, Sections 37-42; see also Kentucky Sales Tax Facts (June 2024) (discussing Legislative Changes from House Bill 8, including Data Center Equipment) (accessible at https://revenue.ky.gov/News/Publications/Pages/Sales-Tax-Facts.aspx).
11HB 8, Sections 11-13; KRS 141.391.
12HB 122, Section 3; KRS 132.010(3)(b) (“‘Real Property’: … (b) For property assessed on January 1, 2024, and on January 1, 2025, includes but is not limited to mains, pipes, pipelines, and conduits that are: 1. Authorized to be installed in, upon, or under any public or private street or place; and 2. Used or to be used for or in connection with the collection, transmission, distribution, conducting, sale, or furnishing of heat, steam, water, sewage, natural or manufactured gas, or electricity to or for the public….”).
13Kentucky Sales Tax Facts (December 2023) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%20-%20December%202023.pdf).
14Kentucky Sales Tax Facts (December 2023) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%20-%20December%202023.pdf).
15KDOR Tax Answers, Sports Wagering Excise Tax (September 12, 2023) (available at https://taxanswers.ky.gov/Sales-and-Excise-Taxes/Pages/Sports-Wagering-.aspx).
16KDOR Tax Answers, Electric Vehicle (EV) Power Tax (May 7, 2024) (available at https://taxanswers.ky.gov/Sales-and-Excise-Taxes/Pages/Electric-Vehicle-Power-Tax.aspx)
17Kentucky Sales Tax Facts (June 2024) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%20-%20June%202024_FINAL.pdf).
18Kentucky Sales Tax Facts (June 2024) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%20-%20June%202024_FINAL.pdf).
19Kentucky Sales Tax Facts (June 2024) (available at https://revenue.ky.gov/News/Publications/Sales%20Tax%20Newsletters/Sales%20Tax%20Facts%20-%20June%202024_FINAL.pdf).
20KRS 141.0401; see also Corporation Income and Limited Liability Entity Tax, Kentucky Department of Revenue (available at https://revenue.ky.gov/Business/Corporation-Income-and-Limited-Liability-Entity-Tax/Pages/default.aspx).
21Discussed at length in Kentucky Local Occupational License Taxes, Mark A. Loyd, Bailey Roese, Stephanie Bruns, and Collier Clay, (Jan. 17, 2023) (available at https://www.ustaxdisputes.com/kentucky-local-occupational-license-taxes/).
22HB 122, Section 3; KRS 132.010(3)(b) (“‘Real Property’: … (b) For property assessed on January 1, 2024, and on January 1, 2025, includes but is not limited to mains, pipes, pipelines, and conduits that are: 1. Authorized to be installed in, upon, or under any public or private street or place; and 2. Used or to be used for or in connection with the collection, transmission, distribution, conducting, sale, or furnishing of heat, steam, water, sewage, natural or manufactured gas, or electricity to or for the public….”).
