Kentucky is about to expand the reach of the state’s 6 percent sales tax to cover more than a dozen things that weren’t previously taxed – all part of plan by the Republican-controlled state legislature to generate hundreds of millions of dollars in revenue while reshaping the state’s tax structure to be more like that of Indiana and Tennessee.
Yet, a little more than a month before the changes take effect, state officials still haven’t settled some thorny questions about just what will be subject to the taxes and what won’t.
Fitness centers will have to begin applying the sales tax to their memberships on July 1. But is the YMCA – a nonprofit organization – required to collect the tax, or only for-profit gyms such as Planet Fitness?
“We are working on that (question) and we will be giving further clarification,” said Richard Dobson, executive director of the Office of Sales and Excise Taxes at the Kentucky Department of Revenue.
Officials are also combating misinformation about the scope of the changes.
For example, many barbers and hairdressers have mistakenly assumed their services will be taxed starting July 1, when in fact they will remain untaxed, Dobson said in an interview last week.
Then there are subtle distinctions that can be hard to follow. A contractor who installs a water heater, garage door opener or furnace at your house should continue not to charge sales tax.
But if you buy a refrigerator or set of laundry machines at Lowe’s or Home Depot, those stores should start collecting the sales tax on their charges for hooking up the machines.
What’s clear is that the changes will hit some services that are widely used by typical Kentuckians, such as the labor on most all automotive work and anything having to do veterinary care, from spaying and neutering animals to euthanizing them.
“I think it’s gonna hurt more working people than it is helping,” said Mike Newton, a mechanic who owns Newton’s Automotive in Louisville’s Pleasure Ridge Park neighborhood. “…The price of working on cars is going to go up 6 percent more and the common person can barely get their car up and running now to get to work and pay their bills and get to daycare and everything like that.”
Republicans lean on sales taxes
Republicans, who hold super majorities in the Kentucky House and Senate, unveiled the tax changes and passed them through both chambers with narrow margins, all in the span of about eight hours, on April 2.
Republican Gov. Matt Bevin vetoed the bill, saying he wanted a more “comprehensive” overhaul of the state’s tax code, but lawmakers voted to override the veto on April 14, putting the changes into law.
The changes also include dropping the state’s income tax to 5 percent, from the current 5.8 percent to 6 percent for income above $8,000. Republicans said they want to make Kentucky less reliant on income taxes and more reliant on sales taxes, with Indiana and Tennessee as their model.
Indiana has a 7 percent sales tax and 3.23 percent state income tax. In Tennessee, sales taxes can near 10 percent depending on the locality, but the state does not tax income earned from jobs.
“These sales taxes where we are broadening the base, you’ll get to keep more of your money and then decide how you want to be taxed based on your spending patterns,” Kentucky Sen. Damon Thayer, the majority floor leader, said on the Senate floor on April 2. “That’s what’s working in places like Tennessee and Indiana – let people decide how much tax they pay based on their purchasing habits.”
Democrats countered that the plan shifts the burden from wealthy to working Kentuckians, and that car repairs and veterinary care are not discretionary luxuries.
Others point out that several services used by the wealthy – accounting, lawyers, architecture – escaped the reach of the new taxes.
Patricia Kennedy, a veterinarian and owner of Jefferson Animal Hospital in Louisville, pointed out that cat and dog owners will have to pay taxes on everything their vet does while the owners of horses, a powerful industry in Kentucky, will not.
“I don’t why we’re considered a luxury and the people who own horses are not considered a luxury,” Kennedy said. “…They’re targeting pet owners, and it’s not fair.”
As part of the changes, about a dozen services that are untaxed today will become subject to the state’s 6 percent sales tax. Those are:
- Landscaping, including lawn / landscape care and maintenance; tree trimming, pruning or removal; landscape design and installation
- Snow plowing or removal
- Cleaning services, both residential and commercial, including carpet, upholstery, and window cleaning
- Veterinary services for “small” animals (such as dogs and cats) but not for cattle, swine, sheep, goats, llamas, alpacas, ratite birds, buffalo, and cervids
- Pet care, including grooming, boarding, pet sitting and obedience training
- Industrial laundry services, including industrial uniform supply services, protective apparel supply services, and industrial mat and rug supply services
- Dry cleaning and non-coin-operated laundry services
- Linen supply services, including table and bed linen supply services and nonindustrial uniform supply services
- Indoor skin tanning (tanning booths, beds and spray tans)
- Non-medical diet and weight reducing services (such as Weight Watchers)
- Limousine rentals, if a driver is provided
- Extended warranties (such as those sold with vehicles and electronics)
Kentucky is also adding the 6 percent tax to any fees – whether monthly or annual memberships or one-time tickets – to enter the following types of facilities:
- Bowling alleys
- Skating rinks
- Health spas
- Swimming pools
- Tennis courts
- Weight training facilities
- Fitness and recreational sports centers
- Golf courses (public and private)
- Campsites and campgrounds, including RV parks
Even government entities – such as state or city parks – that charge admission to a pool or golf course must begin adding the 6 percent tax on July 1.
But state officials are still researching whether various types of nonprofit organizations, such as the YMCA, will have to charge the tax, Dobson said.
Last week Kentucky officials launched a website to better explain the tax changes. They have also set up a phone line – 502-564-5700 -- to take recorded questions from individuals and businesses. Questions can also be emailed to email@example.com.
Taxing auto repairs but not contractors
Perhaps the most complex change is the one that makes most car repairs subject to the 6 percent tax.
Today, any retailer who sells you a physical thing – say, new tires or an oil filter – is required to charge the sales tax only on the thing itself. After July 1, the retailer will have to add the tax to any labor associated with installing the part.
That means some automotive jobs – such as tire rotations and diagnostic services – will continue to be untaxed because there is no sale of a physical good involved, Dobson said.
The labor for an oil change, however, will be taxed because you have to buy oil for the job.
Newton, the auto mechanic in PRP, estimated that at least 90 percent of his jobs involve a new part, so “most everything” his shop does will be taxed.
“The brakes, the tune up – everything’s got parts attached to it,” he said.
Residential and commercial contractors – plumbers, heating and air conditioning, electricians – will not have to charge sales tax for their services.
That’s because they are not retailers, Dobson said. Instead, contractors pay tax when they buy their supplies – such as a pipe or a furnace – and don’t charge the 6 percent to their customers.
The law also makes a distinction between personal property – such as a car or a stereo – and real estate.
Any service that involves something attached to your house – even, say, installing a garage door opener – will remain untaxed.
Dobson said there might be some gray area. For example, landscaping will become subject to the sales tax, but what if a landscape firm is installing a fountain? If it involves putting in a footer or running a water line, the job could fall under untaxed “contractor” activity, he said.
While lawmakers who crafted the changes cited Indiana as a model, Kentuckians may be able to save a buck by going over the Ohio River for some needs.
Indiana applies its sales tax to some lawn care services and some types of extended warranties, but not to veterinary care or the labor for car repairs, according to Emily Landis, spokeswoman for Indiana Department of Revenue.
To be sure, the Hoosier state’s sales tax is a percentage point higher, at 7 percent, than that of Kentucky.
But Kentucky veterinarians are concerned about losing business because none of the commonwealth’s neighboring states tax veterinary care, according to Doug Peterson, a Frankfort veterinarian who is president of the Kentucky Veterinary Medical Association.
“It’s conceivable that people will drive a little bit to get those savings,” he said.
On a $500 surgery for a dog, for example, having the work done by a veterinarian in southern Indiana would save $30 in taxes.
Correction: A previous version of this story misstated the phone number for the Department of Revenue tax answers line.