Kentucky adopts sales tax incentives to increase cryptocurrency mining in the state

As coal mining tumbles down the shaft, mining for cryptocurrency is on the rise. U.S. coal production dropped to 1965 levels in 2020, and production has fallen 47.5% since the first quarter of 2012. By contrast, cryptocurrency is a hot commodity, and now that China has banned bitcoin mining, many entrepreneurs and investors are looking for a new home. Kentucky wants it to be the Bluegrass State.

Nothing says “come make your home here” to a business like a tax incentive. Accordingly, Kentucky has created new sales tax exemptions and gross receipts tax exemptions for the cryptocurrency crowd.

Electricity used or consumed in the commercial mining of cryptocurrency at a facility in Kentucky is now eligible for a sales tax and utility gross receipts tax exemption. To qualify for the exemption, the facility must consume at least 200,000 kilowatt-hours of electricity per month, which should be no problem for any electricity-quaffing mining operation. The exemption applies to electricity sold or purchased on or after July 1, 2021, and before July 1, 2030.

Any facility interested in obtaining the exemption must apply for approval from the Kentucky Department of Revenue. Those granted exempt status will be issued an exemption letter, which the facility must give to electricity vendors to make an exempt purchase of electricity. Facilities with exempt status must furnish the department with a report of the amounts of tax exemption claimed for each fiscal year; these reports are due by November 1, annually.

Kentucky also now provides a sales and use tax exemption for tangible personal property purchased by commercial mining facilities to construct, retrofit, or upgrade eligible projects, “including commercial cryptocurrency mining equipment at a facility.” Qualifying parties interested in taking advantage of this incentive must submit an application with the Department of Revenue; the department is accepting them July 1, 2021, through June 30, 2025.

A separate application is required for each mining facility. Applications must include the name and address of the person seeking the application, a description of the business activities, the business location, and “other pertinent information.” Businesses seeking exempt status must continue to pay sales and use tax on qualifying transactions until the Cabinet for Economic Development approves the project. At that point, the Department of Revenue will issue a refund.

Exempt sales can create sales and use tax registration and filing obligations, and exemption certificate management can be a bear. Automation can help manufacturers and miners navigate these compliance challenges.

The ban in China has many miners looking for a new home. A key consideration for them is the cost of electricity, because cryptocurrency mining consumes an enormous amount of it.

Electricity rates in Kentucky are on the lower end of the scale, so the state is likely on some miners’ maps. Kentucky is intent on winning their business: House Bill 230 notes that “the Commonwealth has an opportunity to become a national leader in the emerging industry of the commercial mining of cryptocurrency given its abundant supply of electricity that can be provided at lower rates than most states, and its established infrastructure to provide such energy through the Tennessee Valley Authority and other electricity providers.” A goal of Senate Bill 255 is to help Kentucky become “a national leader in emerging industries which use substantial amounts of energy.” Additional details can be found in the Kentucky Department of Revenue’s June 2021 Kentucky Sales Tax Facts newsletter.

Of course, other states also want the cryptocurrency crowd to set up shop within their borders. Texas is “very eager to take in China’s Bitcoin expats,” and it too has cheap electricity. It just passed a law that sets the legal status of virtual currencies and clarifies how they can be invested. According to The Washington Post, Texas is now “one of the go-to locations for expanding crypto entrepreneurs the world over.”

There’s been some pushback against the burgeoning virtual currency mining industry in New York state. Earlier this year, the state Senate sought to place a moratorium on the development and expansion of mining operations. It cited concerns over increasing usage of energy in the state and a need to mitigate the current and future effects of climate change. But mining operations in the Empire State are secure for now: The bill died in the House.

To learn more about other tax policies affecting businesses in the U.S., read the Avalara blog.