It’s a new year and with that comes changes to State and Local Tax (SALT) laws that business owners and individuals alike need to be aware of. On January 1, 2023, significant changes went into effect in Kentucky, including changes to the state income tax rate, sales tax collection, and more.

House Bill 8, the law introducing these changes, was passed to update the Kentucky tax code to incentivize new investment in the state. A key focus of this legislation is making Kentucky more business-friendly, particularly in comparison to neighboring states including Tennessee and Indiana which have no or low levels of income tax. Over time, legislators aim to reduce Kentucky’s state income tax levels while expanding the tax base through increases in sales and use taxes.

These changes, as well as any future changes which may occur, have a significant impact on businesses and individuals across the state. In this briefing, we break down the SALT changes that went into effect on January 1, 2023, and outline what business owners and individuals alike need to keep in mind to ensure compliance. 

Individual Income Tax Rate Drops to 4.5%

Under H.B. 8, Kentucky’s individual income tax rate decreased by 0.5%, falling to 4.5% from 5%. Kentucky is one of nine states with a flat individual income tax rate where taxpayers pay the same tax rate, regardless of their income level. For high earners, this 0.5% reduction in the individual tax rate could represent a significant tax saving. 

H.B. 8 also lays out plans for more decreases in future years, provided certain revenue conditions are met. To offset the revenue loss from these rate reductions, the legislation enforces an increase in the collection of sales and use taxes. 

Sales Tax Collection Expands to 35 New Industries

Before 2023, Kentucky collected sales and use taxes on 17 industries. In 2023, 35 new categories were added to this list. Businesses that fall under one of these categories are now required to collect and remit sales tax on all qualifying purchases. 

Sales and use taxes in Kentucky are currently set at 6%. Businesses that are now required to collect sales tax include those in the following industries:

  • Photography
  • Marketing
  • Website design and development
  • Security system monitoring
  • Rental of space for meetings, weddings, or entertainment
  • Others: consult your CPA to determine whether you’re affected

There is nuance in determining whether your business falls under one of these categories and many businesses await further guidance from the Kentucky Department of Revenue. The Department publishes regular tax bulletins, has a comprehensive website with a list of FAQs, and is available to respond to questions via email. 

If your business is required to collect sales tax, it’s vital that you invest in the compliance tools required to satisfy your collection, filing, and remittance requirements. There are several steps that businesses should follow:

  1. Determine whether your business is subject to the expanded Kentucky sales tax
  2. Separate your business into distinct income streams and determine eligibility for each revenue source
  3. Update invoicing methods and explain the addition of a sales tax line item to customers
  4. Build record-keeping and documentation processes
  5. Identify the party responsible for making sales tax filings and put in place internal controls to ensure timely, accurate filing

If you need assistance with any of the above steps, the team at LBMC is here to help. We have significant experience assisting businesses in navigating their tax requirements and are available to advise on the implementation of new sales tax collection infrastructure. 

Residential Utilities Exemption

While the changes to the individual income tax rate and an expansion in sales tax grabbed the headlines, other changes were also made which may affect individuals and businesses. 

One such change was the update to the Residential Utilities Exemption. Previously, this had applied to any residence––regardless of whether it was a primary residence, vacation home, or investment property. From January 1, 2023, this exemption only applies to primary residences. 

This creates additional requirements for real estate investors who own rental properties. If investors pay the utilities for these properties, they must file paperwork with their utility company stating that the property is the primary residence of their tenant in order to ensure they continue to benefit from this exemption. 

Expansion of Taxable Extended Warranty Services to Real Property

From January 1, 2023, the definition for taxable extended warranty services has been updated to include real property. Previously, only extended warranty services covering tangible personal property and digital property were taxable. 

New Taxes on Electric Vehicles

As the adoption of electric vehicles continues to grow, the legislation also introduces new levies against electric vehicles and associated power sources. Unlike the other changes discussed in this overview, these changes do not go into effect until January 1, 2024. 

After this date, there will be an excise tax of $0.03 per kilowatt hour on electric vehicle power distributed by an electric power dealer. Additionally, owners of electric vehicles will be subject to an annual electric vehicle registration fee. Fully electric vehicles will be subject to a fee of $120 while hybrid vehicle owners must pay a $60 registration fee. 

Build a Proactive Tax Strategy with LBMC

If there’s one constant in the world of tax, it’s change. Many businesses have addressed these changes and have already put in place the sales tax collection and remittance structures required to remain compliant with new regulations, however, others are falling behind. 

Taking a proactive approach to determining your business’s exposure is vital in understanding the complexities of these new laws and eliminating the prospect of excess taxation.

At LBMC, it’s our goal to ensure our clients minimize their tax exposure while remaining in compliance with all relevant tax regulations. Our team hosts regular seminars throughout the year to explore changes like these in greater detail and will continue to produce overviews similar to this one. 

Our team provides a full range of strategic tax planning services to help you navigate your business’s tax obligations in an efficient manner. To learn more about LBMC’s tax services, contact us today.