The Kentucky CPA Journal

Tax in the Bluegrass

KENTUCKy's evolving sales tax on services

Issue 2

April 24, 2023

By Mark A. Loyd, JD, CPA

Kentucky’s sales tax is not just a sales tax on tangible personal property. Beginning in 2018 and most recently in 2022, Kentucky has expanded its sales tax to more and more services. Do developments in the 2023 legislative session portend a slowdown or a pull back?

Sales tax expands to certain services in 2018

Kentucky expanded its sales tax to services generally for which the place of performance is the same as where the benefit is received. This is usually the case for landscaping services, janitorial services, small animal veterinary services (except poultry, as amended in 2019), pet care services, and indoor skin tanning services as well as admissions to fitness and recreational sports facilities and short-term camp and RV park site rentals. The sales tax was also expanded to laundry services (i.e., industrial laundry services, linen supply services and non-coin-operated laundry and dry-cleaning services) and non-medical diet and weight reducing services. The sales tax was also extended to extended warranty services and labor and installation services (but not stand-alone services) rendered in installing tangible personal property (with an exception for certain charges for property used in manufacturing or industrial processing). Sales tax was also imposed on limousine services if a driver is provided. The Department of Revenue’s Sales Tax Facts (May 2018) provides a summary of services on which sales tax was imposed in 2018. The Department has also issued informal guidance on its Tax Answers website,

Tax base, pyramiding and sourcing issues emerge

Issues related to the application of sales tax on services (including those that became subject to sales taxes in 2018) concern:

  1. the tax base (what charges are subject to sales tax);
  2. pyramiding (a tax on a tax);
  3. relative compliance burdens (the cost of compliance versus the incremental revenue);
  4. sourcing (which transactions are subject to Kentucky sales tax).

Follow-up legislation in 2019 addressed the first two but not the third.

Recognizing after the fact that nonprofits were adversely impacted by the extension of the admissions tax base to their fundraising events, the 2019 General Assembly exempted sales of admissions and fundraising event sales made by nonprofits. But base corrections can go the other way, and 2020 legislation extended the sales tax to admissions to golf courses run by nonprofits, except for fundraising golf events run by nonprofits.

To address pyramiding, the 2019 General Assembly extended the resale exemption to services subject to tax in 2018. As the sales tax base expands, so must certain exemptions expand to prevent pyramiding, i.e., a tax on a tax. The resale exemption is a classic example as the resale exemption prevents a consumer sales tax from becoming a gross receipts tax. But did this go far enough? Interestingly, the carve out for poultry also addressed pyramiding by removing poultry, which are farmed, from the sales tax on veterinary services tax base.

The classic example of a compliance burden issue is the sales tax on landscaping services, which includes mowing grass, the neighborhood lawn mower. In recognition of this, an exemption was enacted for service providers with less than $6,000 in gross receipts in a calendar year. Also, the 2019 legislation authorized a direct pay authorization holder to issue a direct pay letter to service providers.

So, now you may be thinking, what about sourcing?


Sales tax expands to more services in 2022

Kentucky sales tax expanded again in 2022 H.B. 8, subjecting over thirty more services to sales tax, effective January 1, 2023. A complete list may be found in the Department’s Sales Tax Facts (June 2022). In some ways, the new batch of services enlarged services already subject to sales tax. For example, the exemption from sales and use tax for residential electricity, natural gas, fuels, water, and sewer services found in KRS 139.470(7) was amended to specify that these purchases are only exempt if they are “purchased and declared by the resident as used in his or her place of domicile.” Like the services subject to tax in 2018, several of the services subject to tax in 2022 were primarily provided to individuals, like household moving services, road and travel services provided by automobile clubs, lapidary services, non-medically necessary massage services, personal fitness training services, body modification services, specialized design services, and cosmetic surgery services. But, many services subjected to tax in 2022 are consumed by businesses like private investigation services, process server services, repossession of tangible personal property services, personal background check services, photography and photo-finishing services, lobbying services, executive employee recruitment services, private mailroom services, website design and development services, website hosting, certain repair services, testing services, telemarketing services, and marketing services. 2022 H.B. 8 also subjects software as a service (SaaS) to Kentucky sales tax as prewritten computer software access services. Building on short term rentals of campsites, H.B. 8 subjects parking services and short-term rental of meeting space to sales tax. Many services subjected to tax by 2022 H.B. 8 were not statutorily defined.

Tax base issues continue and difficult sourcing issues emerge

As the sales tax expanded to services consumed by businesses, sourcing issues became readily apparent and significant because unlike most individuals, businesses operate in many states simultaneously. 

As with the 2019 legislation, 2023 H.B. 360 narrowed or better defined the scope of services made subject to sales tax, effective January 1, 2023. Cosmetic surgery services were narrowed to exclude certain medically necessary services. Testing services were defined to exclude governmentally required services. Executive employee recruitment services were defined to mean those for senior-level management positions. And lobbying services were statutorily defined. In contrast, the definitions of storage and use as well as extended warranty services were expanded to extend to prewritten computer software access services, though an exemption was added related to print technology. Likewise, telemarketing services were expanded to include the use of text messages and social media.

For sourcing issues, the Department’s position is that “Sales tax on services is based on where the customer receives the service.” Department of Revenue, Tax Answers (Lobbying Services). Notably, the Department directs taxpayers to the sourcing rules in KRS 139.105 and 103 KAR 30:190.

Perhaps in recognition of the difficulty of sourcing marketing services, the General Assembly retroactively repealed the sales tax on marketing services.

The need for anti-pyramiding and sourcing rules for services

As the sales tax has expanded to more services, especially services used by businesses, more needs to be done to ensure that the sales tax on services does not pyramid into a gross receipts tax. An obvious example is expanding manufacturing exemptions to include prewritten computer software access services. Further, the sourcing rules of KRS 139.105 were conceived when the sales tax was almost exclusively applied to tangible personal property. Does it not make sense to revisit them in light of the nature of rendering services to multi-state businesses?

“Oh, you are having a bad day. Did you die?” Mr. Chow in The Hangover II (2011).

Tax base issues, pyramiding, sourcing … all difficult issues. But they can be handled with thoughtful analysis and planning.

Mark Loyd

About the author: Mark A. Loyd, JD, CPA, is a partner of Dentons Bingham Greenebaum LLP in Louisville and chairs its Tax and Finance group. Loyd chairs the Society’s Editorial Board. He can be reached at; 502.587.3552.