Kentucky Society of Certified Public Accountants

December 17, 2018

Expect calmer waters next year in Frankfort

By Charles George, JD

On election night in 2016, when Republicans took over the state House of Representatives for the first time in 95 years, they promised to shake things up in Frankfort. Whether you agree with their direction or not, they’ve certainly delivered. High-profile bills like right to work, charter school authorization and pension reform spurred protests from teacher and labor groups, while gaining approval by many conservatives and business organizations.

Democrats thought they could turn those controversies, and renewed enthusiasm from the left, into victories at the ballot box last month. Remember those “Remember in November” chants, signs and social media posts? Turns out it didn’t have a lasting impact on the general electorate. On November 6, Republicans only lost two net seats in the House from 2016 (63 to 61), and actually gained a seat in the Senate (27 to 28). It was as good a result the GOP could’ve hoped.

While Republicans, emboldened by the election results, are expected to continue to push their priorities next session, a number of key items will enjoy bipartisan support. Many legislators on both sides of the aisle are likely to come together on tax reform fixes, infrastructure investment and criminal justice reform. Unless pension reform comes crashing down in a big way (which is possible), most political observers expect a kinder, gentler Frankfort next year.

The upcoming 2019 session, a 30-day or “short” session, kicks off on January 8, when the General Assembly will meet for four days to file legislation, formally elect leaders and assign committee chairs before breaking until February 5. The session is slated to end on March 29. Throughout the session, KyCPA will advocate for our members on tax, license and general business issues, and any other issue that affects the CPA profession. Below is a preview of some of the key issues we’ll be closely watching next year.

Tax reform 2.0?

The Kentucky General Assembly took a meaningful step toward comprehensive tax reform (HB 487) during the 2018 legislative session. Among numerous changes, the legislation expanded the sales tax to certain services, moved the personal and corporate tax rate to a flat 5 percent, updated the Internal Revenue Code (IRC) conformity date, and adopted a single sales factor apportionment formula for the corporate income tax with market-based sourcing.
HB 487 also made several key administrative improvements, including the elimination of “pay to play” to appeal a tax case (i.e. supersedeas bond requirement), an extension of time to protest tax notices, and additional time to report tax changes from a federal audit. As a result of these changes, Kentucky improved 16 spots, from #39 to #23, in the Tax Foundation’s 2018 State Business Tax Climate Index.

While progress was made, more work is needed. As is the case with most sweeping legislation, HB 487 will require some cleanup efforts in 2019. KyCPA has identified the following issues that need to be addressed.

Non-profit events – Through a confluence of events, admissions to non-profit fundraising events and activities became taxable effective July 1, 2018. As this was not the intention of the legislature, Kentucky law should be amended to exempt admissions to non-profit fundraising events. The legislature will need to determine the scope of such an exemption, including whether non-profits other than those exempted from tax by Section 501(c)(3) of the Internal Revenue Code will qualify for the exemption.
Resale certificates taxable service providers – In expanding the sales tax to additional services, HB 487 should have provided a clear mechanism for businesses to provide either a resale certificate or direct pay authorization when purchasing taxable services (and property consumed in providing such services) that will be resold.
For example, landscaping is now a taxable service in Kentucky. If a landscaping contractor hires a subcontractor to perform a taxable service, such as laying sod, the subcontractor must collect the sales tax from the landscaper, and the landscaper must collect the sales tax from the customer on the total of its taxable services. This results in tax pyramiding (i.e. tax on a tax), which is bad policy.
Minimum threshold for sales tax collection – HB 487 did not establish a minimum receipts threshold to be met before certain services are subject to the sales tax. Though enforcement is likely limited, any person or business providing a taxable service is required to collect the tax, no matter their level of sales. The legislature should require a minimum level of gross receipts (e.g., $5,000) before sales tax is required to be collected. For example, a teenager who occasionally mows lawns in his neighborhood should not have to register for and collect and remit sales tax.
Mandatory unitary combined reporting – The legislature’s adoption of mandatory unitary combined reporting (UCR) represents a major shift in how multi-state companies calculate their income tax. If Kentucky retains UCR, the legislature should adopt taxpayer-friendly, fair and simple UCR provisions.

The legislature is expected to address these “clean-up” items, but another overhaul of the tax system is not anticipated until 2020. KyCPA will continue to push for additional tax administrative improvements, as well as the repeal (or simplification) of the limited liability entity tax (LLET).

We also believe additional tax reform must include local tax reform, as businesses and individuals consider both levels of government when making investment and location decisions. While the uniform occupational license tax statute (HB 277 in 2012) has eased some compliance problems, additional standardization and consolidated collection mechanisms should be considered.

Pension reform 2.0?

In 2018, the legislature passed significant reforms to the state’s pension systems, including KyCPA-supported changes that moved to level-dollar amortization and shifted the benefit structure for new state employees (including teachers) to more closely reflect the private sector. Most importantly, the legislature has now made it a priority to fully fund the systems and did so in the last state budget plan.

After the session ended, however, the Franklin Circuit Court struck down the law, stating the procedure by which the bill passed violated the state constitution. Because the decision was recently upheld by the Kentucky Supreme Court, legislative leadership has pledged to re-visit pension reform in 2019. At this point, we don’t know if the legislature will try to pass a similar bill or go in a different direction.

Infrastructure investment

A bipartisan effort last year to increase the gas tax and administrative fees, which would have raised upwards of $400 million, couldn’t generate enough enthusiasm while the legislature was also tackling tax and pension reform. Most legislators acknowledge the gas tax desperately needs to be modernized because revenues fluctuate on the price of gas rather than road usage. Hybrid and electric vehicles are also not taxed at the same level as gas-only vehicles. Expect road contractors, business organizations and others to bring another bill in 2019.

Licensing board re-organization

Efforts by the executive branch to consolidate the administration of occupational licensing boards are likely to continue in 2019. Last year, the House narrowly passed a bill to re-organize the state’s 40+ professional licensing boards under the Public Protection Cabinet. The bill created certain standards and protocols - such as board terms, member nomination, license application process, and disciplinary proceedings - by which all boards must follow. It also moved the State Board of Accountancy under the Department of Financial Institutions within the Cabinet. KyCPA and the State Board of Accountancy worked with the Cabinet for months to ensure the board would not be placed in an umbrella state regulatory agency. Although the bill ultimately failed to get a hearing in the Senate, a scaled-down version is expected to be filed next session.

Cybersecurity

Protecting consumer data and sensitive information is a rising priority across the country. During the 2018 legislative sessions, at least nine states passed legislation related to cybersecurity. Kentucky already has a security breach notification law, and attempts have been made in recent sessions to strengthen this law.

Cybersecurity legislation often has a direct impact on CPA firms, who hold personal information related to their clients. While KyCPA supports efforts to protect consumer data, legislation should carefully strike a balance between consumer protection and the compliance burden on businesses.

Arbitration agreements

A Kentucky Supreme Court ruling earlier this year effectively banned the common practice of requiring prospective employees to sign agreements that enact binding arbitration, making the commonwealth the only state to do so. Expect the legislature to address this issue in 2019.

Sports betting

The U.S. Supreme Court’s decision in May to strike down a 1992 federal law that banned sports betting in most of the country opened the door for Kentucky and other states to legalize the activity. Though revenue projections are relatively meager (the state of Nevada only collected $15 million in 2017), many legislators from both parties believe Kentucky should seize on the opportunity to allow sports gaming. However, considering the legislature’s past trepidation when it comes to expanded gambling, you may not want to bet on it.

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These are just a few of the major issues to be considered by the 2019 Kentucky General Assembly. As always, if you have any suggested legislation that will positively impact the CPA profession, feel free to contact KyCPA. Be sure to keep up to speed with the session by reading our weekly legislative updates, and don’t forget to contact your legislators.

About the author: Charles George, JD is KyCPA's VP of government affairs and general counsel. Please call 502.266.5272 with any questions or comments.