UPDATED: The legislature’s year-end revenue bill was heard and passed Monday in the Senate Appropriations and Revenue Committee with new language in a committee substitute before being passed by the full Senate 37-0 Monday evening. Several of the items in the bill are changes and clarifications asked for by the Kentucky Department of Revenue and the Kentucky Finance and Administration Cabinet. However, the bill also includes provisions making substantive changes to state tax policy.
The legislation contains language to allow small business owners to deduct a greater share of their state and local taxes (SALT) from their federal income tax liability. Often known as “SALT parity” or the “SALT cap workaround,” more than two-dozen other states have already passed such bills to provide federal tax relief for small business owners. These bills utilize a tax structure approved by the IRS and have no impact on state coffers. Small business owners save money through a lower federal income tax liability. Unlike SALT legislation in other states, the proposed language in House Bill 360 would not provide business owners with a dollar-for-dollar credit for taxes paid at the entity level, meaning some business owners could be exposed to double-taxation at the state level while still receiving relief at the federal level.
The Senate version of House Bill 360 also seeks to narrow the applicability of a recent Kentucky Supreme Court ruling that preserved a key manufacturing sales tax exemption. In Century Aluminum of Kentucky, GP v. Dept. of Revenue (Century), the Court ruled unanimously to uphold Kentucky’s sales tax exemption for manufacturing supplies. While far less competitive than similar exemptions in other states, Kentucky’s manufacturing exemption serves to limit tax pyramiding and inflation and keep upfront cost manageable for Kentucky businesses. The Court’s plain reading of state law in Century preserved this exemption as it has existed for decades, while the Senate language in House Bill 360 would significantly narrow the ruling’s application. This proposal could jeopardize Kentucky’s ability to attract and retain manufacturing jobs. The Kentucky Chamber and the Kentucky Association of Manufacturers filed an amicus brief in the case. The Department of Revenue recently asked the Court to reconsider aspects of the case.
Other provisions included in both the House and Senate version of the bill include clarifications to new sales tax services added by House Bill 8 from last year. Both versions remove marketing as a taxable service.
House Bill 360 now moves back to the House for concurrence or nonconcurrence. If they do not agree, a conference committee could be appointed.
Stay tuned to The Bottom Line for more updates.
As a KY lifetime taxpayer & 30 year DOR retiree, I ask an audit of KY’s tax exemptions going back to 1994!