Kentucky governor vetoes plan to tax remote sales, broaden sales tax
Update, 4.16.2018: The Kentucky Legislature voted on April 13 to override the governor's veto.
Taxing more services could increase Kentucky sales tax revenue, which the state sorely needs. Taxing sales by out-of-state internet sellers could do the same. Both ideas recently made it into a comprehensive tax reform measure that Governor Matt Bevin vetoed.
Tax more services
On April 2, the Kentucky Legislature approved a tax reform plan that would, among other changes, expand sales tax to a variety of currently exempt services. The following would become taxable under House Bill 487 and House Bill 366:
- Auto repairs
- Country clubs and golf courses
- Fitness and recreational sports (e.g., bowling, skating, swimming, tennis, and weight training facilities)
- Janitorial services
- Landscaping, including lawn care, snow removal, and tree trimming
- Laundry (except coin-operated) and dry cleaning
- Linen supply, including diaper services
- Limousine services
- Non-medical diet and weight loss services
- Overnight trailer campgrounds
- Pet care (boarding and grooming)
- Pollution control facilities
- Tanning services
- Veterinary care (small animals only)
- Warranties (extended only)
The plan also called for raising the cigarette tax from 60 cents to $1.10 per pack, and extending it to electronic cigarettes. And corporate and personal income tax would move to a flat 5 percent rather than the current 2-to-6 percent range.
Tax remote sales
In addition, the bills would impose an economic nexus provision, taxing out-of-state sellers doing a certain amount of business in the state. It would tax sales by “any remote retailer selling tangible personal property (TPP) or digital property delivered or transferred electronically to a purchaser in this state if:
- The remote retailer sold TPP or digital property that was delivered or transferred electronically to a purchaser in this state in 200 or more separate transactions in the previous or current calendar year; or
- The remote retailer’s gross receipts delivered from the sale of TPP or digital property delivered or transferred electronically to a purchaser in this state in the previous or current calendar year exceeds $100,000”
The measure defines “remote retailer” as a retailer with no physical presence in the state, but does not include a marketplace facilitator or a referrer. It defines “marketplace facilitator” as a person who: facilitates the retail sale of tangible personal property or digital property by listing or advertising it for retail sale, either directly or indirectly, through agreements or arrangements with third parties, collects the payment from the purchaser, and transmits the payment to the person selling the property.
A “referrer” is defined as a person who contracts with a retailer or retailer’s representative to advertise or list TPP or digital property for sale or lease; makes referrals by connecting a person to the retailer or the retailer’s representative, but not acting as a marketplace facilitator; and received in the prior calendar year or the current calendar year, in the aggregate, at least $10,000 in consideration from remote retailers, marketplace retailers, or representatives of remote retailers or marketplace retailers for referrals on retail sales to purchasers in Kentucky.
Etsy and eBay are examples of online marketplaces, and more than half of all sales on Amazon.com are marketplace sales. The fact that the bills purposefully exempt marketplace sales and referrers is interesting, given that Pennsylvania, Rhode Island, and Washington recently started taxing them, and several other states (e.g., New York and Oklahoma) are looking to tax them.
Kentucky’s attempts to broaden sales tax to services has received much more press than its attempt to tax remote sales, which many other states have done or are looking to do.
States’ attempts to broaden sales tax often blocked
Many states are looking to tax sales by out-of-state internet sellers these days. Only four states — Hawaii, New Mexico, South Dakota, and West Virginia — presume all services to be taxable. About 17 other states tax certain services performed on tangible personal property, such as repairs and installations.
But with the American economy becoming ever more service based, many states see a need to tax more services. Kentucky has long been one of them. The Kentucky Blue Ribbon Commission on Tax Reform called for broadening the sales tax base back in 2012, and then Governor Steve Beshear fought for it during his tenure. More recently, approximately two dozen state legislatures introduced measures to broaden sales tax in 2017. Yet most of these attempts failed, and Kentucky’s current efforts seem likely to meet the same fate.
What will Kentucky do next?
Although enough Kentucky lawmakers supported the tax reform proposal to send it to the governor, the margins were slim: It won by a mere two votes in the Senate, and seven in the House. It had no support from Democrats, and it may not have enough support to override the gubernatorial veto, which it needs to do to move forward: On April 9, Gov. Bevin vetoed the measure along with a plan to revamp the pension system, calling them not fiscally responsible. In return, lawmakers said his concerns were “misguided.”
This isn’t finished. The governor promised in his 2018 Governor’s State of the Commonwealth and Budget Address that “tax reform is coming,” and yesterday he reiterated the need to modernize the tax code. Whether Kentucky’s eventual solution to its current fiscal woes will include an expanded sales tax base or a tax on out-of-state sellers remains to be seen.
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