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Kentucky Sales Tax: Additional Services Subject to Sales Tax and Other Excise Tax Changes Effective January 1, 2023

By Amy Sandlin, CPA, Senior Tax Manager and James Wooten, CPA, Senior Tax Manager

Starting January 1, 2023, Kentucky sales and use tax will apply to 30+ additional service categories. Businesses that provide these services will be required to collect 6% sales tax from their customers in the new year.

This expansion of sales tax to additional services is from 2022 Kentucky House Bill 8 (HB8). However, Kentucky began taxing services with 2018 legislation and has continued to modify and expand the application of sales tax to services since then.

Any provider of newly taxable services that exceeded $6,000 in 2021 or 2022 must be registered for the collection of sales and use tax beginning January 1, 2023. To help taxpayers prepare for their new sales tax obligations, the Kentucky Department of Revenue recently mailed letters to taxpayers notifying them that they may need to start collecting sales tax in 2023.

The 2022 legislation also expands services already subject to tax and will impact warranty service providers whose services relate to products that are exempt from sales tax and admissions to historical sites. HB8 requires festival and event coordinators to report information on vendors to KY DOR, presumably to help with sales tax enforcement.

HB8 also creates and/or amends several sales and use tax exemptions. It also makes changes to certain excise taxes that will impact campgrounds, vehicle and carsharing rentals, taxi and limousine services, and electric vehicle owners.

The Following Services are Subject to Tax January 1, 2023:

  1. Photography and photo finishing services* – sitting fees, developing and printing original photographs, developing negatives, and tinting or coloring pictures
  2. Marketing services – developing marketing objectives and policies, sales forecasting, new product developing and pricing, licensing, and franchise planning
  3. Telemarketing services – includes telephone, facsimile, email, and other modes of communication
  4. Public opinion and research polling services
  5. Lobbying services
  6. Executive employee recruitment services
  7. Website design and development services
  8. Website hosting services
  9. Facsimile transmission services
  10. Private mailroom services
  11. Bodyguard services
  12. Residential and nonresidential security system monitoring services
  13. Private investigation services
  14. Process server services
  15. Repossession of tangible personal property services
  16. Personal background check services
  17. Parking services*
  18. Road and travel services provided by automobile clubs
  19. Condominium time-share exchange services
  20. Rental of space for meetings, conventions, short- term business uses, entertainment events, weddings, banquets, parties, and other short-term social events*
  21. Social event planning and coordination services
  22. Leisure, recreational, and athletic instructional services – examples: charges to participate in Little League, golf or tennis lessons, and individualized training to increase skills in various recreational and sports disciplines
  23. Recreational camp tuition and fees – camp enrollment that includes recreational activities
  24. Personal fitness training services – instructor-led recreational classes or one-on-one instruction (swimming lessons, fitness classes, personal trainer exercise instruction, yoga lessons, riding lessons, golf lessons, baseball hitting lessons, etc.)
  25. Massage services, except when medically necessary
  26. Cosmetic surgery services*
  27. Body modification services – tattooing, piercing, branding, and other modifications that are not necessary for medical or dental health.
  28. Testing services (excludes medical, educational, and certain veterinary testing)
  29. Interior decorating and design services
  30. Household moving services
  31. Specialized design services
  32. Lapidary services – including cutting, polishing, and engraving precious stones
  33. Labor and services to repair or maintain commercial refrigeration equipment and systems when no tangible personal property is sold in the transaction (including service calls and trip charges)
  34. Labor to repair or alter apparel, footwear, watches, or jewelry when no tangible personal property is sold in the transaction
  35. Prewritten computer software access services

* Click link for additional description of the service category and FAQs provided by KY DOR.

Examples of the types of services to be taxed are included in the bill’s language for some services, while only a handful of the newly taxed services are formally defined.

We expect KY DOR to provide additional guidance in the coming months. Looking back to guidance provided after the 2018 sales tax legislation, we hope to see a robust FAQ section for each of the newly taxed services on KY TaxAnswers website that will provide detailed application of the new rules to industries and specific transactions.

In general, Kentucky sources sales by their destination for sales tax purposes. However, many of the newly taxable services have the potential to cross state lines and even be considered “out of state” and not subject to Kentucky sales tax.

The nature of many of these services – where and how they are performed – complicate how they are sourced. It is easy for businesses outside Kentucky to provide services like photography finishing, marketing, website design, software access, and security system monitoring to Kentucky customers and vice versa.

Therefore, an analysis will need to be done to determine whether the business has sales tax nexus in Kentucky and how much of their sales are subject to Kentucky sales tax.

Changes and Additions to Sales & Use Tax Exemptions

  • $6,000 de minimis threshold: services subject to tax under HB8 are now covered under this existing exemption. Once gross receipts exceed $6,000, all additional receipts will be subject to sales tax.
  • Resale exemption: newly taxable services may be purchased for resale and are therefore exempt from sales & use tax.

Example: a purchaser of taxable website design services who then resells the service to an end customer (in this instance, a web designer that subcontracts out to another entity to design a portion of the website), may issue a fully completed resale certificate to the entity that performed the service.

  • Exemption for drugs and over-the-counter drugs that are purchased by a person regularly engaged in the business of farming and used in the treatment of cattle, sheep, goats, swine, poultry, ratite birds, llamas, alpacas, buffalo, aquatic organisms, or cervids.

Reminder: service providers will be required to keep documentation as specified by KY DOR for sales for which an exemption is claimed.

Extension and Modifications to Services Already Subject to Tax

  • Extended warranty services: sales tax on these services has been expanded to include extended warranty contracts for real property, all tangible personal property, and digital property. This applies regardless of whether the property itself is taxable or exempt.

Example: separately charged extended warranties purchased on exempt property such as machinery for new and expanded industry and motor vehicles sold to certain out-of-state residents will no longer be exempt from sales and use tax.

      • All entity-based exemptions are still valid, therefore, the purchase of an extended warranty contract by a tax-exempt purchaser, such as a 501(c)(3) charitable organization or a governmental entity, may still be exempt from the tax.
  • Admissions to historical sites: the exemption from sales tax has been removed. However, sales of admissions by non-profits continues to remain exempt from sales & use tax.
  • Festival & event vendor reporting: event coordinators (festivals or similar events) are required to provide the KY DOR with a list of vendors selling any tangible property, digital property, or services at the event. This required reporting was effective July 14, 2022.
    • This reporting requirement is expected to impact a wide range of events. For example: a local beer fest, a county festival, all the way up to events as big as the Kentucky Derby.

Excise Tax Changes

  • Electric vehicles**:
    • New excise tax on electric vehicle power distributed by an electric power dealer to charge electric vehicles in the state
      • Excise tax rate: three cents ($0.03) per kilowatt hour
    • Initial & annual vehicle owner registration fees (see below)

** The effective date is January 1, 2024.

Electric Vehicle Registration Fee

A new electric vehicle registration fee will apply starting January 1, 2024:

  • $120 for electric vehicle owners
  • $60 for electric motorcycle and hybrid vehicle owners

Electric vehicle: any vehicle that has plug-in charging capability, regardless of whether the vehicle is powered by (1) an electric motor only; or (2) a combination of an internal combustion engine and electric power.

Electric motorcycle: “motorcycle” or “motor scooter” (a low-speed motorcycle – ex: moped) powered by a: (1) battery or equivalent energy storage device that can be charged with an electric plug using an external electricity source; or (2) combination of an internal combustion engine and electric motor.

Fees collected will be split evenly between Kentucky’s General Fund and Road Fund.

Sales Tax Letters from the Kentucky Department of Revenue

In early November, the Kentucky Department of Revenue began contacting taxpayers by mail if the DOR thought they may provide services subject to sales tax starting in 2023.

Receipt of this letter does necessarily indicate your company’s services are subject to sales tax. Likewise, if you did not receive a letter, that does not mean your company’s services are not subject to sales tax.

All service providers should determine if their specific services are subject to sales tax under this new legislation.

Example letter:

Registration and Collection of Sales & Use Tax

Businesses already registered with a Kentucky sales tax account number should use their existing account and filing process to begin reporting these new service categories for periods on or after January 1, 2023.

Businesses that do not already have a sales & use tax account should use their Kentucky One Stop Business Portal to register.

Taxpayers can also use the One Stop Business Portal to file Sales & Use Tax Returns. These are due on a monthly basis; however, a less frequent filing will be allowed based on the amount of sales reported annually.

KY DOR automatically adjusts filing frequencies each June. However, you may request a change to your filing frequency by contacting KY DOR: KRC.WebResponseSalesTax@ky.gov

If you need help determining the impact of the Kentucky sales tax law expansion on your business, please contact your Blue & Co. advisor today.

 

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