Kentucky to tax many more services

Updated April 14, 2022.

In late March, the Kentucky General Assembly passed a measure to broaden the sales tax to a host of services and phase out individual income taxes. Gov. Andy Beshear then vetoed House Bill 8 “because it imposes new taxes that weaken public safety, harm vital industries, undermine economic development incentives, and threaten Kentucky’s future economic security.” The General Assembly overrode the gubernatorial veto on April 13. 

HB 8 extends sales and use tax to an interesting assortment of services, including conferences and events, lobbying, and web hosting. It also creates an excise tax on electric vehicle power (3 cents per kilowatt-hour), new registration fees for electric and hybrid vehicles, and a 6% gross receipts tax on car and ride-sharing services.

In addition to expanding sales tax, HB 8 cuts the individual income tax rate from 5% to 4% starting January 1, 2023. The income tax will be phased out over subsequent years, provided the state’s general fund receipts exceed a certain level.

According to the measure’s fiscal analysis, reducing the income tax will cost the state an estimated $530 million in fiscal year 2022–2023 and more than $1 million in fiscal year 2023–2024. Taxing more services is expected to generate an additional $57.8 million in fiscal year 2022–2023 and $149.7 million in fiscal year 2023–2024. Yet Scott Peterson, Vice President of Government Relations at Avalara, isn’t sure expanding the sales tax to services will generate enough money to offset the reduction in income tax. 

The Kentucky Center for Economic Policy says the measure would blow a “massive and growing hole” in the state’s budget: “HB 8 includes a few modest revenue raisers that will come nowhere close to offsetting the lost revenue from the eliminated income tax, which funds 40% of Kentucky’s budget.” And Gov. Beshear thinks HB 8 would do more harm than good. “Other states that have drastically cut income tax have seen their economies harmed by those changes,” he explained in his veto message, using Kansas as an example.

However, the Tax Foundation is a proponent of reducing income tax rates and broadening the sales tax base. It believes Kentucky legislators took a “commendable first step” toward tax modernization in 2018 when it dropped the income tax to 5% from 6% and started taxing certain consumer services.

HB 8 extends the sales tax base to approximately 35 services and industries, including:

• Body modification services, including branding, ear pointing, piercing, scarification, tattooing, teeth pointing, tongue splitting, transdermal and subdermal implants, and any other modifications that are not necessary for medical or dental health

• Bodyguard services

• Condominium timeshare exchange services

• Cosmetic surgery services

• Executive employee recruitment services

• Facsimile transmission services

• Household moving services

• Interior decorating and design services

• 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

• Lapidary services, including cutting, engraving, and polishing stones

• Lobbying services

• Marketing services (developing marketing objectives and policies, sales forecasting, new product developing and pricing, licensing, and franchise planning)

• Massage services, except when medically necessary

• Photography and photofinishing services (including digital photography services; excluding photography services necessary for medical or dental health)

• Private mailroom services (address barcoding, delivery to postal services, presorting mail and packages by postal code, private mailbox rentals, and tracking)

• Private investigation services

• Process server services

• Parking services (including valet services and the use of parking lots/structures; excluding parking services at an educational institution)

• Personal background check services

• Personal fitness training services

• Prewritten computer software access services

• Public opinion and research polling services

• Recreational camp tuition and fees

• Rental of space for banquets, conventions, entertainment events, meetings, parties, short-term business uses, short-term social events, weddings, and repossession of tangible personal property services

• Residential and nonresidential security system monitoring services

• Road and travel services provided by automobile clubs (e.g., American Automobile Association)

• Social event planning and coordination services

• Specialized design services, including the design of clothing, costumes, fashion, furs, jewelry, lighting, shoes, and textiles

• Telemarketing services

• Testing services, except testing for educational, medical, or veterinary reasons

• Website design and development services

• Website hosting services

It’s an interesting list, as much for what didn’t make it as for what did. Though summer camps will be taxed, accounting and legal services will remain exempt.  

Furthermore, the bill leaves some questions unanswered. Which massages are medically necessary, and which aren’t? Would a music camp count as a recreational camp? Gov. Beshear notes that many of the newly taxable services aren’t defined by the bill, “meaning many businesses may not know their taxes are being increased.” Now that the General Assembly has overridden the governor’s veto, businesses will need to know which of the services they sell are subject to sales tax. 

Extending sales tax to the above services shouldn’t impact remote sellers because Kentucky’s economic nexus threshold is based only on tangible personal property or digital property.

Some states, like South Dakota, include services in their economic nexus threshold. For more information on state-specific requirements for remote sellers, see our state-by-state guide to economic nexus laws.

HB 8 also authorized the Kentucky Department of Revenue to implement a 60-day tax amnesty program in the fall of 2023. With the veto is overridden, the tax amnesty event will be administered by a third-party contractor as stipulated in the bill.

HB 8 should serve as a bellwether. More states are looking to expand sales tax to services in 2022 and beyond.

Cover photo by Canva