On Jan. 1, 2023, comprehensive tax legislation will take effect in Kentucky, potentially reducing Kentucky’s personal income tax in an effort to promote economic growth. To offset revenue losses, the legislation broadens the sales and use tax base and imposes new taxes and fees on electric vehicles, ride sharing and car rental services. In the near term, businesses must consider whether they must now collect and remit taxes and the effect of these new taxes on existing contracts. Ultimately though, the General Assembly hopes this legislation will help Kentucky remain competitive with surrounding low- or no-income-tax states.
If certain conditions are met, Kentucky’s 5% personal income tax rate will be reduced by 0.5% with potential for further 0.5% reductions through an annual review process. The reduction conditions require (i) the balance of the budget reserve trust fund to be greater than or equal to 10% of the general fund and (ii) the general fund to be sufficient to cover its appropriations for the year with an additional buffer for a potential reduction in the fund due to the lower income tax. These conditions will be reviewed annually based on a review process implemented by the Department of Revenue (the Department). Through this review process, the Department can propose further 0.5% reductions, but any further reductions require General Assembly action.
In addition to removing several prior exemptions, the sales and use tax will be broadened to include 35 additional services. These additional services include marketing services, personal fitness training, cosmetic surgery, parking, rental of space for events, social event planning and coordination services, and athletic instructional services. For example, if a business provides valet services or paid parking services, it will be required to collect sales tax for each transaction and remit that amount to the Department each month. An event coordinator of a festival or similar event will be required to provide the Department with a list of vendors selling any tangible property, digital property, or services subject to sales and use tax. For those retailers that already entered into contracts for newly taxed services before Feb. 25, 2022, these contracts or agreements will not be subject to sales tax, provided they are lump-sum and for a fixed fee or price.
In addition, a 6% excise tax will be imposed for persons providing a motor vehicle for sharing or for rent, with or without a driver. Accordingly, ride sharing services, such as Uber and Lyft, rental car companies, cab services, and limousine services will all be subject to the tax.
Finally, effective Jan. 1, 2024, a new excise tax of three cents per kilowatt hour will be imposed on electric vehicle power distributed by an electric vehicle power dealer who operates electric charging stations. If the electric vehicle charging station is located on state property, an additional tax with an initial base rate of three cents per kilowatt hour will be imposed.
Anyone conducting business in Kentucky should be aware of the potential impact of this new legislation. Please do not hesitate to contact a Dinsmore attorney to discuss your specific situation in detail.