State legislation, like the rest of us, could never have predicted how 2020 would play out. Kentucky had just elected a new governor and was awaiting possible changes to state law in the areas of expanded gambling taxation and the legalization of marijuana. These anticipated changes were submitted when the COVID-19 pandemic hit mid-2020 AGM. As the legislature prepares for its 2021 session starting January 5, there still appears to be some expected changes to state and local taxes in the Commonwealth despite the changes brought about by the pandemic.
Changes in wealth tax assessment
In terms of state taxation, Bill Request 897 is the main pre-submitted bill. This bill proposes that the revised Kentucky Bylaws, Section 132.191, be amended to include a property tax assessment method that the Kentucky Department of Treasury and all 120 elected Kentucky landowners must assess for property assessment for tax assessment purposes at the highest and best use of the property. The bill proposes a definition of “highest and best use” to mean “the reasonable and probable use of real estate that provides the highest valuation score when the use is legally permissible, physically possible and financially feasible”. It is well known that this amendment is aimed at what is often referred to as “dark deals”. This change would allow large retailers who leave a space to evaluate the property as if the business was still in the space. This could be problematic given not only the current economic climate, but also the general trend towards online marketplaces.
Section 172 of the Kentucky Constitution requires all non-tax-exempt properties to be valued at 100% of their fair value. This is the “estimated price the property would bring in a fair voluntary sale”. The case law goes on to state that the requirement of a valuation based on the highest value of what is physically possible for a property can cause major problems. Such a broad requirement could run counter to a large number of sections of the state constitution. Taxpayers, especially large retailers, will therefore want to keep an eye on this legislation.
Tobacco and steam taxation
While tobacco and vaping taxation was a priority for lawmakers around this time last year and the expansion of tobacco taxation for many vape products was successful in 2020, pre-made Bill 425 proposes to amend the Kentucky Bylaws Section 138.140, to change.
It would apply the vapor product tax to an open vapor system when the real price includes both the components and the liquid solution. This is aimed at retailers who sell these products separately and are therefore not subject to the tax as it is currently written. This would take effect on July 1, 2021.
Open Records Changes
While this is not a change to tax law, pre-filed Bill Request 196 could benefit taxpayers filing open filing requests for themselves or through an attorney. This bill would amend the Kentucky Revised Bylaws Section 61,882 relating to Open Records to require the award of costs and legal fees if a court determines that there is no good faith basis for believing that the requested records are excluded from disclosure.
The bill would require a billing if the agency did not have a good faith belief that the records are exempt. Currently, the applicant can receive costs if the agency deliberately withholds records.
In the past, there was a push-and-pull between the Ministry of Finance and taxpayers regarding the release of tax administration guidelines through open file inquiries. 1 This amendment provides additional assistance to taxpayers seeking such information. There is a narrow line between protecting taxpayers’ privacy and ensuring administrative transparency.
This change may provide less protection for the ministry and all government agencies to hide in order to enforce taxpayer privacy and prohibit disclosure as the taxpayer simply needs to demonstrate that it is more likely to be a lack of good faith than willful withholding.
Tax breaks for the sector
There were also several targeted pre-made bills that provided tax breaks for specific populations.
Prefiled Bill Request 153 would expand property tax exemption for veterans service organizations when more than 50% of their annual net income is spent on veterans or other charitable causes.
Prefiled Bill Request 159 would provide a refundable tax credit to certain volunteer firefighters.
Pre-Filed Bill 226 proposes to amend Section 170 of the Kentucky Constitution to include an increase in Ad Valorem taxes in the tax exemption for owners 65 years of age or older that will begin after the end of the year in which the owner was 65 years old. the year the owner bought the property or the date this provision was ratified by voters. The General Assembly must approve this bill in order for it to be included in the next election for voters.
Pre-filed Bill 241 would exclude the pensions of military retirees from state income tax from January 1, 2021 through January 1, 2025.
Prefiled Bill Request 329 would exempt prescription incontinence products from sales and use tax when sold to a person with a medical diagnosis of incontinence and a prescription for the product.
Pre-filed Bill 819 would exempt the sale or purchase of feminine hygiene products from sales and use tax starting July 1, 2021. Restructuring Eventually with the governor’s dismantling of the Kentucky Claims Commission and the reinstatement of the Kentucky Board of Tax Appeals along with the General Assembly must approve this restructuring in the 2021 legislative session.
The governor’s restructuring is expected to be met with opposition as a whole, especially as it reintroduces an obligation to bind remedies for taxpayers who wish to appeal a negative order from the Tax Appeal Board. The Kentucky courts have ruled that Kentucky legal authority does not require a loan to appeal a tax maintenance order, suggesting that provision of the governor’s executive order restoring the board of directors is unlikely to pass the general meeting. 2 Several other pre-filed tax invoices are expected to be processed before year end.
* Note: This article was originally published by Law360 (December 17, 2020).