What You Need to Know about Kentucky Tax Law Changes

An array of additional services will be subject to sales tax in Kentucky next year under a bill enacted over the governor’s veto.

The legislation also reduces personal income tax rates in Kentucky with further reductions taking effect annually under certain conditions, with the goal of eventually eliminating the state income tax entirely.

Supporters say the changes will promote economic growth for the state in the short term while paving the way for future, pro-growth reform. Detractors, including the governor, cite the potential harm to public safety, economic development incentives, and the state’s long-term economic security.

For some entrepreneurs doing business in Kentucky, however, the impact is more direct. Here’s what you need to know.

Individual Income Tax Changes

The legislation calls for the gradual reduction, and potential elimination, of Kentucky’s current 5% individual income tax rate.

Beginning January 1, 2023, the tax rate will drop to 4%, and further rate reductions in increments of 0.5%, will be applied in future years if certain conditions are met by the state.

Sales Tax Expansions

To offset the loss in income taxes, the legislation creates new and expanded sales taxes on certain services. Kentucky currently imposes sales and use taxes on 17 specific services. The legislation adds 35 new categories to the list, also effective January 1, 2023.

Highlights from the list of newly taxable services includes:

• Admissions (except nonprofit and those previously exempted)
• Athletic instruction
• Cosmetic surgery
• Household moving
• Interior decorating and design services
• Marketing services
• Massage (except when medically necessary)
• Parking
• Personal fitness
• Prepaid and prepaid wireless calling service
• Prewritten computer software access services
  • eg. cloud software/software as a service (SaaS)
• Recruiting services
• Rental of any room or rooms, lodgings, campsites, or accommodations
• Website design and development

Businesses providing the newly taxable services must begin collecting sales tax when the legislation takes effect in January. If you buy services in one of these categories, you should anticipate a 6% increase in costs.

Business owners should prepare clients for any hike in fees. They are also required to register with the state to pay the sales tax.  Accounting software and/ or point-of-sale (POS) systems will also have to be updated to collect sales tax and track sales.

Electric Vehicles

Buying and owning electric vehicles (EV) in Kentucky will also be subject to a vehicle charging tax, as well as – beginning January 1, 2024 – initial and annual registration fees of $120 for an EV and $60 for hybrid vehicles.

The charging tax will be a minimum of $0.03 kilowatt per hour with likely annual increases. To put the rates in perspective, a full charge on a 50KW Tesla would be taxed $1.50 in addition to the cost of charging.

How We Can Help You Navigate Kentucky Tax Changes

At Kirsch CPA group, our strategic tax planning services are designed to ensure that taxes never come between you and the success of your business.  That means never paying more than you should or being caught off-guard by business circumstances, changing laws or changes to your tax status.

Contact us to learn more about tax planning and preparation