Tax reform bill headed to the Governor
HB 8, sponsored by Rep. Jason Petrie, is the Republican majority’s plan for the next phase in state tax reform. The 200-plus page bill addresses various tax policy issues, including income tax, sales tax, peer-to-peer car sharing, transient room tax, electric vehicles, and prefabricated homes. The bill is headed to the Governor, and he has 10 days excluding Sundays, to veto, sign, or let the bill become law without his signature.
HB 8 seeks to move Kentucky away from such a substantial reliance on the income tax over time. The bill sets conditions for the income tax rate to decrease in 0.5% increments: the balance of the budget reserve trust fund at the end of the fiscal year must be at least 10 percent of the general fund monies for that fiscal year, and the general fund at the end of the fiscal year must equal at least the general fund appropriations plus the general fund reduction that would occur from a 1 percent decrease in the individual income tax rate.
The Department of Revenue must review and determine if the reduction conditions were met as applied to FY2021 by September 1, 2022. If the conditions are met, the income tax will decrease from 5 percent to 4.5 percent on January 1, 2023. The reduction conditions will be assessed each year to determine if further reductions will occur.
Budget surpluses and federal stimulus dollars have pumped Kentucky’s ‘rainy day fund’ to a record amount – $1.5 billion. The new budget contributes another $250 million to the fund, with about $1.1 billion unappropriated.
That amount unappropriated will be offset by the tax plan passed in House Bill 8. It will reduce the state income tax and expand the sales tax to new services (see below).
Sales and Use Tax
The legislation expands the sales and use tax to almost 40 additional services not currently taxable. The plan does not expand the sales tax to food, prescriptions, or other essential goods and services. See below for a complete list of the services that the expansion and sales tax would include.
Peer-to-Peer Car Sharing
HB 8 establishes a new peer-to-peer car-sharing transportation certificate. Peer-to-peer car-sharing is an emerging industry where individual vehicle owners rent out their vehicles through third-party companies. The bill also levies a 6 percent tax on the gross receipts of rentals by peer-to-peer car-sharing companies, motor vehicle rentals, transportation network services (Uber and Lyft), taxicab services, and limousine services. All funds from this tax will be deposited into the state’s general fund.
The bill also expands the motor vehicle rental license fee currently authorized in counties containing a city of the first, second, or third class to rentals of U-Drive-It, peer-to-peer car sharing programs, and transportation network services (Uber and Lyft).
Transient Room Tax
HB 8 clarifies statutory language for the state and local transient room tax and ensures that rentals through companies such as Airbnb and Vrbo are included in the tax. This may increase revenue for smaller counties that do not currently collect the transient room tax from rentals using these services.
HB 8 creates a new excise tax on electric vehicle charging stations at a rate of 3 cents per kilowatt-hour, which will be adjusted annually based on the National Highway Construction Cost Index 2.0 (NHCCI 2.0). The tax will be added to the selling price charged by electric vehicle power dealers and will require free charging stations except those installed prior to July 1, 2022, to still pay the tax. Revenue collected from this tax will be deposited into the state’s road fund.
The bill also creates new electric vehicles ownership fees to be collected by the county clerk at initial vehicle registration and renewal annually: $120 on electric vehicles and $60 on hybrid vehicles and electric motorcycles. The electric vehicle fees will also be adjusted annually based on the NHCCI 2.0. Revenue collected from the fees will be deposited 50 percent into the state’s road fund and 50 percent into the state general fund.
HB 8 creates a new exclusion on local property taxation on prefabricated homes held for sale in a manufacturer's or retailer's inventory. Prefabricated homes are defined as a manufactured home, a mobile home, or a modular home.
- Non-primary residential utilities (primary residences remain exempt)
- Photography and photo finishing services
- Marketing services
- Telemarketing services
- Public opinion and research polling services
- Lobbying services
- Executive employee recruitment services
- Web site design and development services
- Website hosting services
- Facsimile transmission services
- Private mailroom services
- Bodyguard services
- Residential and nonresidential security system monitoring services
- Private investigation services
- Process server services
- Repossession of tangible personal property services
- Personal background check services
- Parking services
- Road and travel services provided by automobile clubs as defined in KRS 281.010
- Condominium time-share exchange services
- Rental of space for meetings, conventions, short-term business uses, entertainment events, weddings, banquets, parties, and other short-term social events
- Social event planning and coordination services
- Leisure, recreational, and athletic instructional services
- Recreational camp tuition and fees
- Personal fitness training services
- Massage services, except when medically necessary
- Cosmetic surgery services
- Body modification services, including tattooing, piercing, scarification, branding, tongue splitting, transdermal and subdermal implants, ear pointing, teeth pointing, and any other modifications that are not necessary for medical or dental health
- Testing services, except testing for medical, educational, or veterinary reasons
- Interior decorating and design services
- Household moving services
- Specialized design services, including the design of clothing, costumes, fashion, furs, jewelry, shoes, textiles, and lighting
- Lapidary services, including cutting, polishing, and engraving precious stones
- Labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold in that transaction, including service calls and trip charges
- Labor to repair or alter apparel, footwear, watches, or jewelry when no tangible personal property is sold in that transaction
- Prewritten computer software access services
- Extended warranty services expanded to include real property
- Admissions to historical sights are no longer excluded