Are you running a service-based business in Kentucky? Then you should take note of Kentucky’s legislative House Bill 8, passed in 2022. 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 changes of House Bill 8 took effect on January 1, 2023.
THE GOOD NEWS – (DEBATABLE)
The good news is that the bill lowers state income taxes from 5% to 4.5%. At the start of 2023, Kentucky’s personal income tax automatically went from 5% down to 4.5%. House Bill 1 formalizes that a further reduction to 4%, will be effective 2024. Sounds like good news, but some are opposed to the drop in income tax liability:
“This bill is a giveaway to the wealthiest Kentuckians that will strain the state budget over time and jeopardize future investments in schools, health, housing and other needs across the commonwealth.… Rather than fund lavish tax giveaways to the wealthy, the legislature should use the current surpluses to make critical and transformative investments in the commonwealth, and protect key services in the future.” – The Kentucky Center for Economic Policy statement
While some are claiming many families will feel a relief to the deductions in their paychecks, others say now they will be paying more for services like family photos, little league and fitness training. If you peruse the services, most of them are primarily business-to-business services (marketing, public opinion polling, executive employee recruitment, website design) or luxury services (massage, interior design, bodyguarding), that the low to middle income families would not consider essential services. So are they really going to have an effect on most low or middle income families?
THE BAD NEWS – (FOR SOME)
So while the reduction of income tax over the next two years is positive news to many, the downside is that to accomplish this reduction, House bill 8 expanded sales tax on dozens of service-based businesses, from personal fitness training to rideshares to cosmetic surgery and more.
Businesses that provide the new services are required to collect the 6% sales tax from their customers beginning January 1, 2023, unless otherwise noted. In the area of sales and use tax, thirty-four (34) additional service categories become subject to tax. Below is a complete list of newly taxed services:
- Photography and photo finishing
- Public opinion and research polling
- Executive employee recruitment
- Website design and development
- Website hosting
- Facsimile transmission
- Private mailroom
- Residential/nonresidential security system monitoring
- Private investigating
- Process server services
- Repossession of tangible personal property
- Personal background checks
- Road and travel services
- Condo time-share exchange services
- Short-term rental of space
- Social event planning and coordination Leisure, recreational and athletic instructional services
- Recreational camp tuition and fees
- Personal fitness training
- Non-medical massage
- Cosmetic surgery
- Body modification (piercing, tattoos)
- Testing services
- Interior decorating and design
- Household moving
- Specialized design (fashion)
- Lapidary services
- Labor and services for commercial refrigeration
- Labor to repair or alter apparel, footwear, watches or jewelry
- Prewritten computer software access services
Have questions about the specifics of any of the services listed above? The Kentucky Department of Revenue (DOR) has posted a dozens of FAQs to provide guidance on these newly taxable services. Some of the topics included are cosmetic surgery, lobbying services, massage services, parking services, photography, rental spaces, and testing services.
SALES TAX FACTS & FAQs:
- The June 2022 edition of the Kentucky Sales Tax Facts newsletter provides an overall summary of these legislative changes.
- The September 2022 edition of the Kentucky Sales Tax Facts newsletter provides more details on some of the expanded services included in House Bill 8.
- The December 2022 edition of the Kentucky Sales Tax Facts newsletter gives details regarding the Residential Utility Exemption.
OTHER CHANGES MADE:
Other changes that were approved in House Bill 8, according to the Kentucky’s DOR website (https://taxanswers.ky.gov), the following changes were made:
- An expansion of the 1% state transient room tax along with the various local transient room taxes to include campgrounds and RV parks.
- KRS 138.472 establishes a new 6% excise tax on the gross receipts of vehicle rentals, peer to peer car sharing rentals, transportation network company services, taxicab services and limousine services.
- KRS 138.477 imposes a new excise tax on electric vehicle power distributed by an electric power dealer to charge electric vehicles in the state at the rate of three cents ($0.03) per kilowatt hour. There are also annual electric vehicle owner registration fees established in KRS 138.475. The effective date for the electric vehicle power tax and electric vehicle registration fees is January 1, 2024.
BEGINNERS GUIDE TO COLLECT, REPORTING & PAYING SALES TAX
If you are one of the small businesses that provides any of the 34 services listed above, you may be feeling overwhelmed and unsure how to begin the year or retroactively start collecting sales tax, if you have not yet begun. Take note, the good news is that your customer is actually the one paying the sales tax. You will charge it and collect it and pay it back to the state, as more of an intermediary, rather than having to absorb the cost yourself. So besides the time and hassle of redoing your POS system or accounting software, filing the right paperwork, there is no additional tax liability for your small business.
So let’s get started on the five steps:
Step 1: Determine if your product or service is subject to sales tax.
Read the section above and Kentucky’s DOR’s website with the full list of services, including detail on each of the listed services: https://taxanswers.ky.gov/Sales-and-Excise-Taxes/Pages/default.aspx
If you are still unsure, because certain services you offer fall in a ‘gray area’, please contact a staff member of the DOR via their TaxAnswers contact form: https://taxanswers.ky.gov/Pages/contact.aspx. Or for a timelier and more personalized answer, call your CPA or Tax Accounting professional. Your accountant knows your business well, its tax history, financial status and future analysis, and understands the ins and outs of your unique business services.
*If you are selling services online or outside Kentucky, please contact your CPA on the current laws and exemptions.
Step 2: Register for a sales tax permit.
This is easier than you think, and the good news is that you can get a Kentucky Sales Tax Permit and be ready to do business 2-3 weeks after you submit your application. You need the following information to apply for a Kentucky Sales Tax Permit:
- Effective date
- Legal business name
- Previous account numbers
- Primary business location
- Ownership type
- Information sales
- NAICS business classification code
- Owner’s Social Security Number
And as far as the application fee, the turnaround time and the renewal information, the following information is specific to Kentucky:
- Application Fee: FREE
- Turnaround Time: 2-3 weeks
- Permit Renewals: No Renewals Needed
You can easily acquire your Kentucky Sales Tax Permit online using the Kentucky One Stop Business Portal website. If you have questions about the online permit application process, you can contact the Department of Revenue via the sales tax permit hotline (502) 564-3306.
Step 3: Calculate the sales tax rate.
At the outset, the sales tax rate that your company must charge depends on where you sell. If you sell in multiple states, you’ll need to calculate and collect the tax in each of those states. In Kentucky, as of January 1, 2023, the sales tax rate is 6%.
Step 4: Collect the sales tax at your point of sale or checkout cart.
Whether you choose to use a POS, QuickBooks, Square or make your own calculations, you’ll need to display the amount of sales tax separately from the purchase price of the item.
For QuickBooks Online, here is how you add a tax rate and agency:
- Go to Taxes, then select Sales tax (Take me there).
- Under the Related Tasks list on the right, select Add/edit tax rates and agencies.
- Select New and choose either a single or a combined tax rate.
- Enter a name for the tax, the agency you pay, and the percentage for the rate. …
- Select Save.
Watch the video:
Step 5: Send sales tax return and payment to the state.
The last step is to submit your sales tax return to the state, along with the actual payments you’ve collected from customers. If you use accounting software like QuickBooks, you can set it up to have sales tax payments automatically post to a separate account.
States assign you a filing frequency when you register for your sales tax permit. In most states, how often you file sales tax is based on the amount of sales tax you collect from buyers in the state.
In Kentucky, you will be required to file and remit sales tax either monthly, quarterly or annually (calendar year or fiscal annual). If filing monthly, Kentucky sales tax returns are always due the 20th of the month following the reporting period. If the filing due date falls on a weekend or holiday, sales tax is generally due the next business day.
You have two options for filing and paying your Kentucky sales tax:
- File online – File online at the Kentucky Department of Revenue. You can remit your payment through their online system.
- Sales Tax Management with Innovative Accounting – You’ll never have to worry about spreadsheets, calculations or filling out complex sales tax returns. We can manage your sales tax for you and submit the payments via QuickBooks. We will ensure that the liabilities are accurate each month and that your sales tax is set up correctly.
Calculating, collecting, and reporting sales taxes can be a pain, but ultimately, sales taxes go towards a good cause. These taxes are what fund state and local budgets and pay for schools, roads, fire prevention, and other important issues. If you are looking for a financial and tax advocate for your small to medium size business, please reach out to us and learn more about the unique way Innovative Accounting serves its clients.
Having people personally know you and your business help us to provide exceptional service that is individualized to your circumstances, including how you prefer communication, how involved you would like to be, and are aware of the details that make your company unique. What are you waiting for? No pressure, no strings.