The Kentucky CPA Journal

Legislative

2023 Legislative review

Issue 2
April 24, 2023

By P. Anthony Allen

Thursday, March 30, marked the end of the 30-day Legislative Session of the Kentucky General Assembly with the passage of significant policy reforms, technical corrections, and a new pass-through entity tax. 

With supermajorities in both Chambers of the General Assembly, Republicans passed overrides on multiple Gubernatorial vetoes. However, differences were not limited to party affiliation alone. Kentucky House of Representatives and Senate Republicans differed on various proposals, including sports wagering, medical cannabis, illegal gaming machines, education policies, and the phase out of the distilled spirits property tax. Political party differences aside, many bipartisan legislators and the Governor agreed upon many significant reforms in addition to an unemployment insurance cleanup, technical tax fixes, and a reduction of the individual income tax rate from 4.5 percent to 4 percent, effective January 1, 2024. 

Three pieces of legislation consequential to tax practitioners, taxpayers, and the CPA profession overall this Session that achieved final passage into law were House Bills (HB) 1, 5, and 360. KyCPA does not take policy positions on tax rates, as we leave those decisions to policymakers to either raise, decrease, or alter revenue for the state. In contrast, the Society focuses on the administration and competitiveness of the Commonwealth’s tax policies for tax practitioners and their clients. 

House Bill 1 will continue the individual income tax rate reduction schedule outlined by the 2022 Session’s House Bill 8 by decreasing Kentucky’s rate by 4.5 percent to 4 percent, effective January 1, 2024. House Bill 360 includes multiple technical tax corrections to Kentucky’s expanded sales tax base, updating U.S. Internal Revenue Code conformity to January 1, 2023, allowing the deductibility of business expenses covered by restaurant revitalization grants from January 1, 2020, to March 11, 2023, and implementing state and local tax (SALT) parity relief via a new pass-through entity tax. House Bill 5 creates a schedule to phase out the property tax on distilled spirits stored or aging in bonded warehouses or on premises by 2042 and includes additional tax corrections to reforms adopted via HB360.  

Due to support through your membership, contributions to the KyCPA-PAC, and involvement with our policy initiatives, the Society had the financial support and professional expertise to elevate key legislative priorities in the General Assembly, specifically regarding HBs 1, 5, and 360. To ensure your interests were represented in Frankfort, the Society’s advocacy team directly met with policymakers and collaborated with business stakeholders. With over 850 bills reviewed, monitored, and directly impacted this Session, this article will evaluate the Society and business community’s priority issues during the 2023 Legislative Session.  

Tax legislation

As the top tax priority for Republicans in the General Assembly this Session, House Bill 1 was introduced on January 3, 2023, to continue with the individual income tax rate reduction schedule set forth by 2022 Session HB 8. As a reminder, reduction conditions are specified as the balance in Kentucky’s Budget Reserve Trust Fund or “Rainy Day Fund” at the end of a fiscal year must be greater than or equal to ten percent of General Funds for that fiscal year. In addition, the General Fund at the end of a fiscal year must also be greater than or equal to General Fund appropriations plus the amount of reduction in the General Fund from a one percent reduction to the individual income tax rate. Following a review by the Kentucky Department of Revenue, Office of State Budget Director, and interim committees of the General Assembly, it was determined Kentucky had met these conditions during fiscal year 2022 and therefore required a confirmation vote by the legislature to lower the individual income tax rate by 0.5 percent. After receiving supermajority support in both the House and Senate, the Governor ultimately signed HB1 into law effective January 1, 2024, lowering the individual income tax rate to 4 percent. 

On the day HB1 was signed into law by the Governor, House Bill 360 was introduced with minor amendments to existing statute. On March 7, the House Appropriations and Revenue Committee introduced amendments to HB360 which contained multiple tax correction provisions consisting of separate legislation introduced throughout the Session. There were several statutory updates to Kentucky’s expanded sales tax base, including:

• Car rental and ride sharing tax.
• Cosmetic surgery services.
• Executive employee recruitment services.
• Extended warranty services/prewritten computer software access services.
• Lobbying services.
• Marketing services exemption.
• Telemarketing services.
• Prewritten computer software access services.
• Residential and nonresidential security system monitoring services.
• Testing services.
• Residential utilities sales tax, multi-unit residential rental facility or mobile home and recreational vehicle park resident sales tax exemption.
• Water and sewer projects, allow the governmental exemption to flow through to the contractor purchases, with an amendment to allow all government water and sewer projects.
• Exempt the sublease or sub-rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events if the tax is paid by the primary lessee to the lessor.
• For nonprofit civic or other nonprofit organizations that operate a fundraising event solely with volunteers, sales of concessions for leisure, recreational, or athletic fundraising purposes of sales of leisure, recreational, or athletic services are exempt from sales tax, pages.

Additional statutory guidance was necessary to assist the Department of Revenue in implementing the new sales taxes. All the new sales taxes implemented by 2022 Session HB8 were effective January 1, 2023, updated definitions and clarifications were critical for practitioners this filing season. 

HB360 also included key provisions encompassing all KyCPA’s top tax policy priorities for this Session. These include an update to Kentucky’s conformity with the U.S. Internal Revenue Code as of January 1, 2023. Due to state revenue implications, this update excludes conformity with Internal Revenue Code Sections 179 and 168(k). Business expenses covered by restaurant revitalization grants received during COVID-19 will now be deductible for all funds utilized by Kentucky businesses from January 1, 2020, to March 11, 2023. SALT parity relief via implementing a new pass-through entity tax retroactive to January 1, 2022, was implemented via HB360 as an electable mechanism that provides a 100 percent pass-through entity tax credit and credits for taxes paid to other states.

Other provisions in HB360 include amendments to the individual income tax rate reduction conditions, tax increment financing agreements, the establishment of a rural housing trust fund, property tax valuation method for multi-unit rental housing, and centralized tax reporting and distribution system for state and local transient room taxes. Please review the Tax Reform tab on KyCPA’s website for additional information and detailed references. 

A temporary provision of HB360 to narrow the manufacturing supplies sales tax exemption promulgated by the Kentucky Supreme Court’s ruling in Century Aluminum of Kentucky, GP v. Department of Revenue, ultimately left out of the final version of the bill. Due to KyCPA and other business stakeholders’ advocacy efforts, this exemption was, sustained, especially as litigation over the issue remains ongoing in Kentucky courts. The proposed amendment would have created a significant tax burden on Kentucky manufacturers, led to tax pyramiding concerns, and made Kentucky a manufacturing supplies sales tax outlier in the region.

The implementation of SALT parity relief in Kentucky was critical to the Commonwealth’s competitiveness and avoidance of becoming a tax policy outlier amongst other states in the South and Midwest regions. This year, Indiana and West Virginia sought retroactive SALT parity relief to January 1, 2022, setting a precedent for Kentucky’s path to align our tax policies with surrounding states. However, with the Governor’s signature of HB360 into law on March 24, there remained multiple concerns with the administration, implementation timeline, and compliance with U.S. IRS Notice 2020-75. During the Governor’s veto period from March 17 to March 28, KyCPA member feedback was crucial to understanding specific concerns, formulating a strategy to implement corrections before the end of the Session, and acting upon these issues within the short time period.  

With two legislative days left following the Governor’s veto period, specific amendments were added to House Bill 5, which proposed to phase out the property tax on distilled spirits stored or aging in barrels located in a bonded warehouse or premises by 2042. HB5 received specific amendments by the Senate Appropriations & Revenue Committee that made technical tax corrections to the telemarketing services sales tax definition and the new pass-through entity tax. 

Via HB360, text messages and “including but not limited to various forms of social media” were added to the telemarketing services sales tax statutory definition. HB5 struck the specific language regarding social media from the telemarketing services definition. HB5’s SALT parity technical corrections included:

• Additional statutory definitions detailing entities, owners, and the designation of an authorized person to make a pass-through entity tax election. 
• These corrections were specifically included to ensure compliance with U.S. IRS Notice 2020-75 guidance and include all pass-through entities such as S corporations, trusts, etc.
• Pass-through entity tax elections can be made after March 31, 2023, but before August 31, 2024, for 2022 tax returns. 
• No late payment, late filing, or other similar penalties will be imposed.
• No interest will apply to the pass-through entity tax paid.
• Therefore, amended returns can be made retrospectively when an election is made for 2022 tax returns.
• For 2022 and 2023 tax years, electing entities will not be required to make estimated payments and no tax penalty will be assessed.
• The pass-through entity tax credit was made refundable. HB360 originally had the credit as non-refundable. 
• The pass-through entity tax provisions immediately become effective upon passage into law due to a statutory emergency clause. 

Due to the timing of the retroactive implementation date of January 1, 2022, numerous practitioners relayed their concerns regarding the timing of the legislation and its proximity to the April 18 filing deadline. In addition, many pass-through entity owner returns had been filed before the introduction of HB360 and the statutory language posed multiple interpretation concerns. HB5’s corrections aimed to address many of these specific issues. KyCPA member feedback, comments, and participation in the policy process remained crucial as the Society advocated for policies that would only improve laws and regulations that dictate tax practitioners, their firms, and clients. HB5 was signed into law by the Governor on March 31, 2023.

Licensing policies

This Session did not include specific movement regarding CPA professional policies. However, introduction of legislation established universal recognition of occupational licenses in Kentucky. A universal licensing board was established via House Bill 343 to broadly issue occupational licenses or government certifications to individuals seeking a licensed profession and hold a certification in another jurisdiction or state. Although the intent of a universal licensing board is to simplify the licensing process, this produces multiple unintended consequences for the credibility of the state’s financial system, advisor confidence, and specific professions, especially CPAs. The Kentucky State Board of Accountancy holds sole authority to issue licenses, recognize reciprocity, and set standards for CPAs practicing in the Commonwealth. The Board, comprised of CPA practitioners from throughout the state, appointed by the Governor and recommended nominations provided by KyCPA. This system allows practicing CPAs to have a voice in regulating a profession that maintains mobility and reciprocity in 49 of the 50 states. 

Other business legislation 

Besides tax and licensing policies, other significant legislation passed that will impact Kentucky’s business community moving forward. House Bill 146 is a cleanup to 2022 Session House Bill 4, which reforms the state’s unemployment insurance system. HB146 includes specific points of clarification after the U.S. Department of Labor produced suggested technical corrections for Kentucky to remain compliant with federal unemployment insurance law. Technical updates include changing the maximum duration of weeks receiving unemployment insurance benefits from 12 to 16 weeks during low unemployment periods. 

House Bill 551 creates a new regulatory framework for sports wagering in Kentucky. The Kentucky Horse Racing Commission will oversee the administration and regulation of this newly legalized form of wagering. Under this new legislation, sports betting will be taxed 9.75 percent at horse racing facilities and 14.25 percent online. According to the Kentucky Legislative Research Commission, this new type of wagering is projected to raise approximately $23 million for the state annually. 

House Bill 594 addressed concerns with unregulated gaming machines across the Commonwealth. In Kentucky, the three forms of legal gaming are the lottery, charitable gaming, and parimutuel wagering on horse racing. These previously unregulated gaming machines fell outside the current legal framework and were made illegal by this legislation.

Senate Bill 47 creates a new regulatory structure for medical cannabis that will become effective January 1, 2025. One of the components of the legislation disallows users from smoking cannabis but permits use of the substance for medicinal purposes in other forms. This legislation will allow for the acquisition, cultivation, distribution, and manufacturing of medical cannabis under specific regulatory guidance from the state government. 

Future policy issues of note

House Bill 46 was introduced early in the Session and would conform Kentucky to Section 179 of the U.S. Internal Revenue Code as of January 1, 2023. As a reminder, exempted is Section 179 from Kentucky’s conformity with the U.S. Internal Revenue Code since 2001. Conformity with Section 179 would allow the election to expense certain qualifying equipment on state tax liabilities. House Bill 123 was also introduced and proposed to exempt entities with gross receipts of less than $100,000 from paying the limited liability entity tax for taxable years beginning on or after January 1, 2024. Each of these bills did not make it far in the legislative process this Session, however, conversations regarding these initiatives are starting to occur in Frankfort. 

Conclusion

Leveraging the expertise of the CPA profession provides the Society the credibility to advise policymakers on tax, audit, and professional CPA issues. Your involvement is critical to provide us with advice and protecting the profession. Following this Session, the Society will proactively offer its professional, expert, and practitioner guidance to the Department of Revenue for the implementation of clear administrative guidance regarding the reforms included in the multiple tax changes passed this Session. KyCPA will continue to inform our members of the various legislative, legal, and regulatory changes that are or will become effective in 2023.