After being approved in Kentucky’s House and Senate, then being vetoed by Kentucky Governor Andy Beshear, H.B. 8 was officially ratified on April 13, 2022. The ratification required the Republican Supermajority to impose an override of the Governor’s veto in the last two days of the Kentucky General Assembly’s recent session. House Bill 8 will significantly impact Kentucky’s tax code for individuals and businesses.
Under the bill, the state’s 5% individual income tax will be lowered gradually, over a period of years if key trigger points are met. The bill will also broaden Kentucky’s sales tax base and impose new taxes on certain high-growth services in high-growth industries such as entertainment, personal fitness, ride sharing, and electric and autonomous vehicles. These changes in Kentucky’s tax code are meant to promote economic growth in the short term and lay the groundwork for future pro-growth reform.
H.B. 8 specifies that a 0.5%point reduction to Kentucky’s individual income tax will be triggered under two specified conditions:
- When the balance in the Kentucky Budget Reserve Trust Fund (BRTF) reaches at least 10% of specific General Fund (GF) receipts at the end of a fiscal year
- When the GF receipts at the end of a fiscal year exceed GF appropriations by at least the amount that would be needed to reduce the individual income tax rate by a full percentage point.
If both trigger conditions are met for fiscal year 2021, Kentucky’s individual income tax rate of 5% will automatically be reduced to 4.5% starting January 1, 2023. If these conditions are met again in fiscal year 2022, this would conceivably lower the individual income tax rate to 4% in 2024, although further reduction is contingent upon reaffirmation by Kentucky’s legislature. Within these defined trigger conditions, individual income tax rate reductions in both 2023 and 2024 are highly likely.
In addition to changes to income tax, H.B. 8 broadens Kentucky’s sales tax to high-growth services that are frequently consumed to offset a percentage of the planned income tax cuts. Newly taxed consumer services under the bill include personal fitness, athletic instruction, cosmetic surgery, expanded event parking and admissions, residential moving, and other labor and professional services. It will also extend to various, key growth business-to-business services such as telemarketing, general marketing and website development services and others. Click here for a full list of newly taxable services.
Tax Amnesty and Other Tax Implications
Additionally, Kentucky H.B. 8 enacted a tax amnesty to run from October 1, 2022, to November 29, 2022, available for most types of taxes from taxable periods on, or after October 1, 2011, but prior to December 1, 2021. The amnesty excludes certain state and local real property tax, ad valorem tax on motor vehicles, motorboats, and personal property tax payable to local officials. The tax amnesty offers potential waiver of penalty and 50% of interest due on past due tax liabilities.
H.B. 8 also includes several excise tax changes to bring consistency to the taxation of vehicle rental and ride sharing services such as Uber, Lyft, traditional taxicabs, certain limousine services, and traditional car rental services by taxing these services at a rate of 6% (matching the sales tax rate). In addition, H.B. 8 creates a new tax on energy distributed through electric vehicle charging stations and new registration fees for electric and hybrid vehicles.
Newly Taxable Services Under Kentucky H.B. 8
- Prewritten computer software access services – aka software as a service subscription
- Marketing services
- Web site design and development services
- Web site hosting services
- Telemarketing services
- Public opinion and research polling services
- Lobbying services
- Executive employee recruitment services
- Residential and non-residential security system monitoring 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
- Pet care services, including but not limited to grooming and boarding services, pet sitting services, and pet obedience training services
- Industrial laundry services, including but not limited to industrial uniform supply services, protective apparel supply services, and industrial mat and rug supply services
- Non-coin-operated laundry and dry-cleaning services
- Linen supply services, including but not limited to table and bed linen supply services and non-industrial uniform supply services
- Indoor skin tanning services, including but not limited to tanning booth or tanning bed services and spray tanning services
- Non-medical diet and weight reducing services
- Extended warranty services
- Photography and photo finishing services
- Facsimile transmission services
- Private mailroom services, including
- Presorting mail and packages by postal code
- Address barcoding
- Delivery to postal service
- Private mailbox rentals
- Bodyguard services
- Private investigation services
- Process server services
- Repossession of tangible personal property services
- Personal background check services
- Parking services
- Valet services
- The use of parking lots and parking structures (excluding any parking services at an educational institution)
- Road and travel services provided by automobile clubs as defined in KRS 14 281.010
- Condominium time-share exchange 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, 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
For more information on the tax implications around Kentucky H.B. 8, please contact a CSH advisor.