Updates to Kentucky sales tax on services with House Bill 360
By Caroline McDonnell
On March 24, 2023, Kentucky Gov. Andy Beshear signed into law House Bill 360 (HB 360), which includes several tax-related changes.
Here are the important updates to watch for, including changes to Kentucky sales tax on services and the IRC conformity date:
IRC conformity
HB 360 updates Kentucky's IRC conformity date to December 31, 2022, including amendments extending provisions that would otherwise have terminated on December 31, 2022, but excluding amendments made after that date. This change is effective for tax years beginning on or after January 1, 2023.
Sales and use tax changes
House Bill 8 (HB 8), enacted in 2022, imposed sales and use tax on an additional 34 services. Many of these services were not defined in HB 8, requiring the Kentucky Department of Revenue (KY DOR) to issue guidance on many of these services through frequently updated FAQs.
These changes by HB 360 are applicable retroactively to January 1, 2023. They clarify the definitions of services made taxable in HB 8, as well as amend certain taxability and exemption provisions.
Lastly, the bill strikes former KRS 139.200(2)(r) and 139.010(22), which imposed tax on, and defined, "marketing services," making such services nontaxable.
Taxable services clarification
HB360 added the following clarifications to taxable services, retroactive to January 1, 2023:
- Telemarketing services: Ky. Rev. Stat. 139.010(48), formerly (47), has been amended to expand the definition of "telemarketing services" to include the use of text messages or social media to solicit contributions or promote, take orders or provide information or assistance regarding products or services.
- Extended warranty services: Ky. Rev. Stat. 139.010(15)(a), formerly (14)(a), has been renumbered and expands "extended warranty services" to include contracts to repair, replace, support or maintain prewritten computer software access services.
- Storage: Ky. Rev. Stat. 139.010(45), formerly (44), has been amended to expand the definition of "storage" to include the keeping or retention in Kentucky of prewritten computer access services.
- Use: Ky. Rev. Stat. 139.010(50), formerly (49), has been renumbered and adds a new subsection (b)(2) to specify that a "use" does not include the keeping, retaining or exercise of any right or power over prewritten computer services purchased for use outside of Kentucky and transferred electronically outside Kentucky for use solely outside Kentucky.
Amended taxability and exemption provisions
Retroactive to January 1, 2023, HB 360 makes the following changes to amended taxability and exemption provisions:
- Short-term rental space: Ky. Rev. Stat. 139.480(35) has been added to provide an exemption for the rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties or other short-term social events, if the tax otherwise imposed is paid by the primary lessee to the lessor. This exemption applies to such rentals made on or after February 25, 2022.
- Prewritten computer software access services: Ky. Rev. Stat. 139.480(36) has been added to provide an exemption for prewritten computer software access services sold to, or purchased by, a retailer that develops prewritten computer software for print technology and uses and sells prewritten computer software access services for print technology.
Elective pass-through entity tax
HB 360 allows partnerships and other pass-through entities (PTEs) to elect to pay Kentucky income tax at the entity level (i.e., the PTE tax).
The election can be made only upon consent of all investors holding more than 50% ownership in the PTE. If made, the election is binding on all investors. PTEs must make the election on a form to be prescribed by KY DOR.
The election is available for tax years beginning on or after January 1, 2022, and must be made by the 15th day of the fourth month after the close of the tax year or the 15th day of the 10th month after the close of the tax year if filing under an extension.
Restaurant revitalization grants
Restaurant revitalization grants, as well as related deductions and tax attributes, will receive the same treatment for state income tax purposes as they do for federal individual and corporate income tax purposes. This change applies retroactively to January 1, 2020, but before March 11, 2023.
Individual income tax
HB 360 amends Ky. Rev. Stat. 141.020 to adopt a process requiring the Office of the State Budget Director to evaluate whether additional rate reductions may be adopted for tax years beginning on or after January 1, 2025.
How Wipfli can help
Wipfli’s knowledgeable state and local tax team can help you minimize your tax exposure. We monitor the ever-evolving tax landscape so that we’re ready to help you take advantage of the latest benefits. Contact us today to learn more about how we can help you gain a competitive advantage with your taxes.
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