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Kentucky Tax Reform: What Does It Mean for the Manufacturing Industry?

05/17/2018 Robin Teeters

Statewide Sales and Use Tax on Services Imposed

For the first time in Kentucky state history, a sales and use tax was imposed on labor or services for maintenance, repair, and installation, of “tangible personal property, digital property, or service sold.” While business owners and operators were frantic to decipher the consequences of HB 366, one thing was certain, the new bill left the Kentucky manufacturing industry in a state of angst. 

Quick to recognize the bill’s impact on the state economy, regional industry groups rallied to provoke change. Thanks to the diligence of the Kentucky Society of CPA’s Tax Committee and other industry groups throughout the 2018 General Assembly, a technical corrections bill was released, rectifying several key issues threatening the prosperity of the manufacturing industry.  With the contents of HB 366 remaining largely intact, HB 487, passed on April 27th, provides welcome relief to the Kentucky manufacturing industry.

HB 487 Offers Manufacturing Industry Reprieve

While the new sales and use tax remains, HB 487 includes an exemption for manufacturers and industrial processors. The exemption renders services and labor to “items used directly in manufacturing or industrial processing” as non-taxable, and, therefore, retains the same treatment in effect prior to tax reform.  Although new to Kentucky, the taxation of labor and services has been in effect in neighboring states for years and the exemption keeps Kentucky manufacturers on more equal footing with those surrounding states while also modernizing Kentucky’s state tax policies. 

Effective July 1, 2018, additional taxable services likely of most interest to manufacturers include the following:

  • Landscaping and lawn care services (Industry groups are already working with the KY Dept. of Revenue to define the parameters of “landscaping” and “lawn care services.”)
  • Extended warranties
  • Janitorial services
  • Industrial laundry services

Additional Modifications Impacting Manufacturers

Other key provisions in HB 487 will impact those doing business in Kentucky:.

  • The repeal of the sales tax exemption for pollution control facilities – A sales and use tax now applies to the purchase of property that, prior to July 1, 2018, could have been purchased tax free if certified as a pollution control facility.
  • The sales and use tax energy exemption for some manufacturers and industrial processors is now limited.  
  • Kentucky now has provisions to require out of state manufacturers selling into Kentucky to be required to collect sales tax if they meet one of two thresholds:  1) 200 or more separate sales transactions in Kentucky in the previous or current calendar year, or 2) Kentucky gross receipts exceeding $100,000 in the previous or current calendar year.  These provisions only become enforceable if the current physical presence standards, established by Quill Corp. v. North Dakota, are overturned by the U.S. Supreme Court.  More information should be available on these provisions in the summer of 2018.

Action Steps

With the effective date of July 1st rapidly approaching, it is critical that your business is prepared for these tax reform modifications. Suggested next steps are as follows:

  • Open a use tax account if you have not already done so.
  • Update your project budgets to show the amount of tax that will be due.
  • Plan how to gather the appropriate data and retain the appropriate records.
  • Set up internal processes to ensure the tax is correctly charged on invoices or self-assessed and remitted to the State.
  • Identify the individual who will file the monthly returns.

For more information regarding Kentucky Tax Reform and State and Local Tax guidance, please contact Robin Teeters, or visit us at https://vlcpa.com/state-local-tax

Revenue Recognition Standards for Manufacturing and Distribution Companies

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