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Kentucky Legislature Passes IRC Conformity, Other Changes – Tax & Accounting Blog

The Kentucky Legislature passed and sent to Gov. Matt Bevin significant income, sales and use, and cigarette tax amendments. Among other changes, the legislation would:

  • update the Internal Revenue Code (IRC) conformity date for computing corporate and personal income tax liability from December 31, 2015 to December 31, 2017;
  • replace the graduated income tax rates with a flat 5% rate for both corporations and individuals;
  • adopt a single receipts factor apportionment formula for assigning business income to Kentucky;
  • required market-based sourcing rules for assigning receipts to Kentucky from services and intangibles;
  • reduce the pension income exclusion to $31,110;
  • eliminate withholding exemptions, certain itemized deductions, and certain personal and dependent credits;
  • amend the film industry income tax credit to remove commercials, impose a $1 million annual statewide cap, and make the credit nonrefundable and nontransferable;
  • suspend new industrial revitalization, investment fund, and angel investment credits until July 1, 2022;
  • create a new income tax credit for property tax paid on business inventory;
  • repeal several income tax credits;
  • expand the list of services subject to sales tax to include services like landscaping services, limousine services, and extended warranty services;
  • add sales tax definitions like “extended warranty service,”“marketplace retailer,” and “admissions;”
  • revise sales tax laws to update references to “tangible personal property, digital property, or an extended warranty service;”
  • add charges for installing or applying tangible personal property, digital property, or services to the sales tax definition of “gross receipts” and “sales price;”
  • add sales tax exemptions for certain admissions;
  • add campsites, campgrounds, and recreational vehicle parks to the list of places offering taxable short-term lodging;
  • expand “retailer engaged in business in this state” to include certain remote sellers and those engaged in selling or offering extended warranty services;
  • remove the sales and use tax exemption for property certified as a pollution control facility;
  • impose a July 1, 2022, sunset date for new applications for the sales and use tax credit for motion picture filming purchases;
  • increase the new tire fee from $1 to $2, subject it to sales tax, and extend it to July 1, 2020;
  • increase the $0.56 surtax per pack of 20 cigarettes to $1.06;
  • allow for reductions in cigarette tax and cigarette surtax for electronic cigarettes on account of modified risk;
  • exclude electronic cigarettes from the cigarette tax definition of “cigarettes;” and
  • require a physical inventory of cigarettes be taken on June 30, 2018, a return filed on the inventory, and taxes paid.

The tax package emerged suddenly during negotiations on an appropriations bill. Most of the tax changes would be effective for tax years after 2017.

H.B. 366, as passed by the Kentucky House of Representatives and Senate on April 2, 2018.

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Author: CCHTaxGroup

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